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Brazil Unexpectedly Cuts Key Interest Rate

September 1, 2011

by AQ Online

Citing concerns about slowed global as well as domestic growth, Brazil’s central bank cut its key interest rate from 12.5 percent to 12 percent on Wednesday. The move, which follows five rate increases this year, surprised many and worried investors concerned about inflation. It also raised questions about government influence on monetary policy, as a number of politicians, including President Dilma Rousseff, had recently called for a rate cut.

The Banco Central do Brasil’s monetary policy committee, Comitê de Política Monetária (Copom), voted five to two on Wednesday to cut the Selic rate by 50 basis points, translating to an interest rate decrease of 0.5 percentage points. A Reuters poll of 20 economists showed that they all expected the central bank to maintain the rate at 12.5 percent; investors expected at most a decrease of 25 basis points.

In a statement accompanying the news, Copom said that in “reevaluating the international scenario, [it saw] a generalized reduction of great magnitude in the growth projections” for the U.S. and European economies. The committee was concerned that this dip would affect the domestic economy through reductions in trade, weaker investment flows, tighter credit, and pessimism among consumers and businesses. The statement said effects were already being felt in declining growth projections for the Brazilian economy.

Signs of an overheated economy and unsustainable growth have lately begun to manifest themselves in Brazil. The real has appreciated more than 40 percent against the dollar since the end of 2008, hurting the manufacturing sector through less competitive exports and cheaper imports. As of mid-August 2011, annual inflation stood well above the central bank’s target 6.5 percent upper limit—at 7.1 percent. Throughout this year, Brazil has been taking steps to tighten its economy, not only raising the key interest rate multiple times, but also cutting spending and requiring banks to increase their reserves. Nonetheless, Copom said that at this time it considered the balance of risks against inflation to be “more favorable.”

Though government officials say that the central bank maintains independence in setting interest rates, Rousseff’s administration said earlier this week it was increasing its 2011 surplus target to pave the way for looser monetary policy, and central bank president Alexandre Tombini has in the past advocated for greater policy coordination with finance ministry officials.

Tags: Brazil, Economic Policy, Central Bank of Brazil, Comitê de Política Monetária (Copom)


 
 

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