Bloomberg News

Brazil Signals at Least One More Parsimonious Key Rate Cut

June 08, 2012

Brazil’s central bank signaled it will reduce its benchmark interest rate for an eighth straight time in July after saying the economy is recovering at a “very gradual pace.”

Policy makers, who reduced the overnight rate by a half point to a record 8.5 percent last month, said today in the minutes to their May 29-30 meeting that “disinflationary” global conditions and a slower-than-anticipated recovery are limiting inflation risks. They said 2012 inflation in both their reference and market outlooks slowed since their April meeting and are around their 4.5 percent target.

‘The overall tone shows a lot of concern with the domestic and international outlook for growth,” said Solange Srour, chief economist at BNY Mellow ARX. “Another cut of 50 basis points seems to me pretty obvious now.”

The bank repeated language used in its April minutes, when it slowed the pace of easing, to signal that its comfortable with more half-point rate cuts as it waits for past stimulus to fully work its way through the economy.

The central bank “evaluates that the slowdown of the Brazilian economy in the second half of last year was bigger than anticipated and that the recovery is taking place a very gradual pace,” policy makers said. “Given the accumulated and delayed effects of policy action up to the moment, any additional monetary flexibility should be conducted with parsimony.”

Growth Slowdown

Brazil said June 1 that the economy grew 0.2 percent in the first quarter, less than half the pace analysts predicted in a Bloomberg survey and slower than Japan’s 1 percent expansion.

The report prompted Brazilian Finance Minister Guido Mantega to abandon his 4.5 percent growth target for this year. Mantega said the government would be satisfied if the economy’s expansion in 2012 exceeded last year’s 2.7 percent rate, which was the second-worst performance since 2003.

The bank has lowered the Selic by 400 basis points since August in an attempt to bolster economic growth and shield the second-largest emerging market from what policy makers today said is a “fragile” global economy.

The yield on interest rate future contracts maturing in January 2013, the most traded in Sao Paulo, fell 8 basis points to 7.81 percent at 10:18 a.m. local time. The real fell 0.2 percent to 2.0360 per U.S. dollar.

Slower growth is helping tame inflation. Consumer prices rose 0.36 percent in May, less than analysts expected, pushing the annual rate to 4.99 percent, the lowest since September 2010.

Extra Stimulus

President Dilma Rousseff’s government has cut taxes on consumer and industrial goods and boosted low-cost loans by the state development bank BNDES to help accelerate growth. She’s also ordered state banks to cut borrowing costs in a bid to induce private lenders to make more credit available.

Still, the extra stimulus hasn’t prevented economists from cutting their growth forecasts over the past. Analysts surveyed by the central bank reduced their median estimate for expansion this year to 2.72 percent on June 1 from 3.23 percent four weeks ago.

The May 29-30 Copom meeting was the first in which the central bank revealed how each director voted. Brazil’s central bank also created last month a new position on its board to improve transparency and communications after bank President Alexandre Tombini said it is increasingly important for central banks to provide “forward guidance” to the market.

Rousseff is expected to nominate Luiz Edson Feltrim, currently executive-secretary, to the Senate for the post.

To contact the reporter on this story: Andre Soliani in Brasilia at

To contact the editor responsible for this story: Joshua Goodman at

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