Bloomberg News

Brazil Bets on Eighth Straight Rate Cut as Growth Trails Region

July 10, 2012

Brazil today is expected to cut its benchmark lending rate for the eighth straight time as cheaper credit and government stimulus measures fail to revive an economy that has become the region’s worst performer.

The central bank, which in August became the second in the Group of 20 after Turkey to ease monetary policy in the face of Europe’s debt crisis, will reduce its benchmark rate by a half- point from an already record low 8.5 percent, according to 51 of 53 economists surveyed by Bloomberg. One analyst expects a 75 basis point cut while the other sees a quarter-point reduction.

With households burdened by rising debt and businesses losing confidence, the credit-led growth model that helped pull 40 million people out of poverty since 2003 is showing signs of fatigue. Brazil’s economy will grow 2.01 percent this year, its second-worst performance since 2003, according to a central bank survey published this week. That is the slowest expected growth among the nine largest economies in the Western Hemisphere, according to economists surveyed by Bloomberg.

“It’s a lost year, in terms of growth,” said Carlos de Freitas Gomes, a former central bank director who is now chief economist at Brazil’s National Federation of Commerce. “The authorities miscalculated” in their attempt to revive growth by easing credit conditions, he said.

Over the past month the government has adopted 12 stimulus measures, including extending tax breaks on white goods, boosting government purchases of buses and extending subsidized loans for select manufacturers.

Not Enough

Such measures may be too little, too late and a sign the government may be running out of options, said David Rees, an emerging market economist at Capital Economics Ltd.

“The fiscal measures that have been announced so far have been pretty small fry,” Rees said in a telephone interview from London. “There is a limit as to how far they can really revive activity because Brazilian consumers have already taken on huge amounts of debt.”

The consumer default rate in May rose to a 30-month high, reaching 8 percent, while the share of household income used to service debt stands at 22 percent, double the level in the U.S.

Falling investor confidence amid an uncertain global economic outlook is exacerbating a lack of competitiveness among Brazilian manufacturers, said Flavio Castelo Branco, chief economist at the National Industry Confederation.

“Lower rates don’t translate into more investment,” Castelo Branco said to reporters in Brasilia on July 5. “It’s frustrating, because with all these measures we had expected a recovery.”

Inflation Contained

In what may be a bellwether of the slack that exists in the world’s biggest emerging market after China, the extra stimulus, rate cuts and 10 percent slide in the currency over three months aren’t fueling price increases. While inflation remains above the bank’s 4.5 percent target, it dipped below 5 percent in May for the first time in 20 months and slowed to 4.92 percent in June after prices fell in three of nine categories.

The slower-than-expected recovery from a contraction in last year’s third quarter should allow policy makers led by bank President Alexandre Tombini to maintain the pace of interest rate reductions at half-point intervals, a government official familiar with the bank’s deliberations said last week.

Traders are wagering the central bank will cut the Selic rate by 50 basis points today and at least 25 points at its next meeting Aug. 28-29, according to Bloomberg estimates based on interest-rate futures.

Low Investment

The effectiveness of rate cuts has been curtailed because of the lack of progress in improving the country’s investment climate and tackling longstanding bottlenecks such as poor infrastructure, high taxes and a rigid labor market, the same official said on the condition of anonymity because he’s not authorized to discuss monetary policy.

Brazil invested 20 percent of gross domestic product last year, the lowest among Latin America’s major economies and compared with 48 percent in China, according to International Monetary Fund data. In the first quarter, investments fell 1.8 percent from the previous quarter, the national statistics agency said.

Hardest hit is Brazil’s industry, which saw production fall in May for a third straight month, as slumping global demand offset gains from a weaker currency that makes Brazilian goods cheaper.

The trade deficit for manufactured products has widened by more than $5 billion in the first five months of the year to $39.8 billion, even as the government tightened customs controls and increased import tariffs on chemicals, textiles and other products.

Uncertain Outlook

A weaker economy and large inventories that were built up in anticipation of stronger sales are hurting the truck and engine business of Navistar International (NAV:US) Corp. in Brazil.

“Demand for 2012 vehicles is lower than expected until the market absorbs the excess 2011 inventory,” Andrew Cederoth, chief financial officer of the Lisle, Illinois-based company, said in a June 7 earnings call.

While most economists see growth accelerating in the second half of the year, they disagree over the pace of the recovery.

Pedro Tuesta, senior Latin America economist at 4Cast Inc., said that his 2 percent growth forecast will be difficult to achieve and that he is considering cutting his outlook to 1.7 percent.

Lending Curbs

“The evidence is not very compelling,” he said by telephone from Washington, citing banks that are unwilling to lend and income levels that may not rise.

Some employers are already firing workers. More than 6,000 machinists have been laid off this year, according to the machine builders’ association known as Abimaq. Volvo AB said July 4 that it is cutting 208 jobs at its Curitiba truck plant to adjust output “to the current market reality,” joining Daimler AG’s Mercedes-Benz, which laid off 1,500 workers in May.

Despite the bad news, Finance Minister Guido Mantega is sticking to his call that the economy will be growing at a 3.5 to 4 percent annualized rate in the second half of the year, and some investors seem willing to believe him.

“As we have seen in the past, the Brazilian economy changes quickly,” said Navistar’s Cederoth. “As rapidly as things slow, things can recover.”

To contact the reporters on this story: Raymond Colitt in Brasilia at; Matthew Malinowski in Santiago at

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

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