Bloomberg News

Brazil Signals Further Interest Rate Cuts as Inflation Slows

July 19, 2012

Brazil’s central bank reiterated that inflation will continue to slow toward its target, signaling it will further reduce interest rates that have already been cut to a record. Swap rates fell.

In the minutes to its July 10-11 meeting published today, the bank said future monetary easing would be carried out with “parsimony,” repeating language it used ahead of its two previous meetings to signal half-point rate cuts. The bank’s board voted unanimously last week to cut the Selic for an eighth straight time to 8 percent.

Brazil’s economy has been slow to react to tax cuts, lower borrowing costs and other stimulus measures as companies cut production and overstretched consumers delay purchases of big- ticket items amid a global slowdown. While gross domestic product expanded at half the annualized pace of the U.S. in the first quarter, policy makers said today that growth will pick up during the remainder of the year without stoking inflation.

“At the moment the risks for the inflation trajectory remain limited,” the bank said in the minutes. Policy makers said the international outlook remains “disinflationary” and a domestic recovery “gradual,” adding that they don’t anticipate any “extreme event” in financial markets. The bank said its central outlook takes into account a “more intense rhythm of economic activity” in the second half of the year.

Swap Rates

Traders increased bets that central bank President Alexandre Tombini will reduce the Selic in the next two meetings as he waits for evidence the economy’s recovery from a contraction in the third quarter of 2011 is strengthening. Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo, fell six basis points to 7.7 percent at 10:51 a.m. local time. The real fell 0.1 percent to 2.0255 per U.S. dollar.

“The only thing that will make the central bank stop cutting is consolidated evidence that economic activity is accelerating,” Marcelo Salomon, co-head for Latin America economics at Barclays Plc, said in a phone interview from New York. “The bank is very comfortable with inflation.”

The bank has lowered the benchmark rate by 450 basis points since August in an attempt to bolster economic growth and shield the second-largest emerging market from the European debt crisis.

Traders are betting the bank will lower the Selic by as much as 75 basis points by November, according to Bloomberg estimates based on swap rates.

Bad News

Slower growth is translating into smaller consumer price increases, as inflation slowed to 4.92 percent in June, its lowest level in two years. The central bank targets inflation of 4.5 percent plus or minus two percentage points.

President Dilma Rousseff’s government received more bad economic news this month, after the government reported that industrial output fell for a third straight period in May and retail sales fell the most in more than three years.

Economists covering Brazil cut their 2012 growth forecast to 1.9 percent, according to the latest central bank survey. The estimate fell below 2 percent for the first time this year and marked the 10th straight weekly reduction. GDP expanded an annualized 0.8 percent in the first quarter.

Inflation Concerns

Still, with the currency declining 7.2 percent in the past three months, more than all 16 major currencies tracked by Bloomberg, the cost of imports is under pressure, threatening the bank’s benign inflation outlook.

The IGP-M index, which is 60 percent weighted in wholesale prices, rose 1.11 percent between June 21 and July 10, the Getulio Vargas Foundation said today. That was more than the forecast of all 18 economists surveyed by Bloomberg, whose median estimate was for a 1 percent rise. Producer prices rose 1.45 percent, the most this year.

“The Brazilian economy will start to react to interest rate cuts, and economic activity should improve by the end of the year,” Fernando Fix, chief economist at Votorantim Wealth Management & Services, said in a July 18 telephone interview from Sao Paulo. Even so, he said, the pace of recovery is “frustrating.”

Finance Minister Guido Mantega said on July 4 that gross domestic product will be expanding at a 3.5 percent to 4 percent pace in the second half of the year as the stimulus measures work their way through the economy.

To contact the reporters on this story: Matthew Malinowski in Santiago at; Andre Soliani in Brasilia at

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

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