Bloomberg News

Brazil Signals More Rate Cuts to Accelerate Slow Recovery

June 28, 2012

Brazil’s central bank signaled it will continue to cautiously cut interest rates to bolster a sluggish economy, as Europe’s debt crisis worsens and inflationary risks remain low. Interest rate futures fell.

The central bank, in its quarterly inflation report today, trimmed its 2012 growth forecast to 2.5 percent from 3.5 percent in March. Slower global and domestic growth will help tame inflation next year, the bank said. Consumer prices will increase 5 percent in 2013, according to the bank’s reference scenario. The March report forecast prices would rise 5.2 percent next year.

“The change in the growth forecast reflects, in part, the fact that the recovery is materializing in a very gradual manner,” policy makers said, repeating language used in previous communications that any future monetary easing will be carried out with “parsimony.”

The bank’s report reinforces expectations that it will cut its benchmark Selic interest rate by at least 50 basis points each in its next two monetary policy meetings, said Newton Rosa, chief economist at Sul America Investimentos.

Slow Recovery

“Weaker international growth and a slower domestic economic recovery support the scenario of less inflation and rate cuts,” Rosa said by telephone from Sao Paulo. “I think it won’t reduce the pace,” he said, referring to the 50 basis- point rate cut in the May 30 decision of the bank’s monetary policy committee, or Copom.

Yields on interest rate future contracts maturing in January 2014, the most traded in Sao Paulo today, fell six basis points to 7.88 percent at 3:31 p.m. local time. The real weakened 0.8 percent to 2.0924 per U.S. dollar.

Since the last inflation report in March, volatility on international markets has heightened and Brazil’s economy has grown below its potential, supporting a benign outlook on inflation, the central bank said. “In the Copom’s view, the risks to the inflation trajectory at this moment remain limited,” the report said.

A separate report today showed that inflation remains under control. The IGP-M index, 60 percent of which is weighted in wholesale goods, rose 0.66 percent in June, the slowest pace in three months, the Rio de Janeiro-based Getulio Vargas Foundation said on its website.

2014 Target

The National Monetary Council, or CMN, today set the inflation target for 2014 at its current level of 4.5 percent plus or minus two percentage points, Marcio Holland, secretary for economic policy at the Finance Ministry, told reporters in a teleconference.

Since August, Brazil has cut the Selic rate by 400 percentage points to 8.5 percent, more than any other member of the Group of 20 nations. Traders expect the Selic will be reduced to as low as 7.5 percent by the end of the year as the government tries to revive economic growth.

In just over a month, analysts have shaved more than one percentage point off their 2012 growth estimate for Brazil, lowering it to 2.18 percent, according to a central bank survey released June 25. Economists predict the biggest emerging market after China will slow for a second straight year even as the government steps up efforts to boost investments and fuel demand. The economy grew 2.7 percent last year after expanding 7.5 percent in 2010.

Wholesale Prices

Consumer prices rose 0.17, the least in a year, while wholesale prices climbed 0.74 percent after jumping 1.17 percent in May, according to the IGP-M index.

Inflation as measured by the benchmark IPCA-15 price index decelerated for a ninth straight month in June to 5 percent, slowing more than analysts had forecast.

The central bank today said that prices should rise 4.7 percent this year after the 12.5 percent depreciation of the real against the dollar over the past three months put pressure on import costs, according to its reference scenario. That’s up from a 4.4 percent forecast in the March report.

Inflation is converging toward the bank’s target, which is within the bounds of international credibility, Holland said.

Extra Stimulus

President Dilma Rousseff announced yesterday the latest round of measures to offset the impact of slower global growth on Latin America’s biggest economy. She pledged to boost government purchases of trucks, buses, ambulances, defense equipment and tractors by 6.6 billion reais ($3.2 billion) in the second half of the year.

The government also reduced the borrowing costs for state- funded investments to a record. The long-term reference rate for loans from the BNDES state development bank will be cut to a record low 5.5 percent from 6 percent.

Earlier this year, the government reduced taxes on cars, boosted funding for the BNDES and removed curbs for credit growth.

The strong recovery implied in today’s central bank projections may be overly optimistic, said Flavio Serrano, senior economist at Banco Espirito Santo Investment Bank.

“We maintain a view of a weak economy on average,” Serrano said by telephone from Sao Paulo. “The government isn’t dealing with investment. It’s no use to keep stimulating consumption.”

The central bank will take into account the delayed impact of rate cuts in its monetary policy to “avoid unnecessary fluctuations in economic activity,” it said in today’s report.

To contact the reporters on this story: {Raymond Colitt} in Brasilia Newsroom at rcolitt@bloomberg.net; {Andre Soliani} in Brasilia at asoliani@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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