The central bank on Wednesday lowered its benchmark Selic rate to 7.25 per cent, with economists saying rates are now close to the bottom after being slashed nearly in half in 13 months.
“We are nearing the end of the cycle,” said David Beker, economist with Bank of America Merrill Lynch.
The interest rate decision follows a warning from the International Monetary Fund in its latest review that the world economy is doing worse than expected, with emerging markets a major part of the slowdown.
Brazil’s central bank was one of the first from a large emerging economy to react with alarm to the deepening of the eurozone crisis last year. It took markets by surprise at the end of August 2011 by abruptly reversing a tightening cycle that had taken interest rates as high as 12.5 per cent, citing deteriorating global conditions and a contraction in Brazil’s industrial sector.
Economists believe that a sharp slowdown inBrazil’s economy is partly due to domestic factors, with labour costs outstripping productivity, particularly among manufacturers.
“They are concerned with domestic activity and the risk that activity is not going to be moving higher as we go into 2013,” Marcelo Salomon, economist at Barclays, said of the central bank’s decision.
The central bank said that the decision to cut rates by 25 basis points was not unanimous, with five members of its monetary policy committee voting in favour of a cut and three against.
The bank said the cut was made in consideration of “the risks to inflation, the recovery in domestic economic activity and the complexity enveloping the international environment”. The ambiguous language left open the possibility of another minor cut next month.
Brazilhas employed a mix of interest rate cuts and intervention in carefully selected industrial sectors with protectionist measures and tax cuts to try to halt the downward slide of the economy.
Economic growth slowed from 7.5 per cent in 2010 to 2.7 per cent last year and this year is expected to sink as low as 1.5 per cent.
Economists are predicting a rebound to about 4 per cent next year but the government is expected to take no chances, with further infrastructure investment measures planned.
Inflation, always a concern inBrazil, has re-emerged in recent weeks. After falling to as low as 4.9 per cent in June, the 12-month inflation rate bounced back to 5.28 per cent by September, pushing towards the upper end of policy-makers’ target of 4.5 per cent plus or minus 2 percentage points.
The economy is revealing some signs of renewed growth, with the central bank’s forward indicator for gross domestic product showing an uptick in recent months.
But economists say industrial production is still uncertain, with auto sales declining 31 per cent in September compared with August when they benefitted from a one-off boost from a government tax cut.
“We see a relevant risk of lower auto production and sales causing a slowdown in fourth quarter GDP,” investment bank Itaú BBA said.
The challenge for the government is to translate the steep fall in interest rates wrought by the central bank into better lending rates.
President Dilma Rousseff has urged banks to cut interest rates, which inBrazilare among the highest in the world, but has met resistance from financial institutions, which argue such decisions should be left to the market.
2012-10-11 By Joe Leahy in São Paulo Source: http://www.ft.com