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Brazil central bank cuts rate for first time in 3 years

Thursday, October 20, 2016 - 06:46
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Brazil's central bank cut its key interest rate for the first time in more than three years on Wednesday as a new centre-right government's reforms fuel hopes of a recovery in Latin America's largest economy.

[BRASÍLIA] Brazil's central bank cut its key interest rate for the first time in more than three years on Wednesday as a new centre-right government's reforms fuel hopes of a recovery in Latin America's largest economy.

The bank lowered the benchmark Selic rate by 0.25 points, to 14 per cent - still one of the world's highest.

It cited a dip in inflation and forecasts that a long recession - Brazil's worst in a century - is nearing its end.

"The available evidence is compatible with a recent stabilisation of the Brazilian economy and the possible gradual recovery of economic activity," the bank's monetary policy committee said in a statement.

The rate had been in a holding pattern since the last in a series of hikes in July 2015, as the bank struggled to tamp down double-digit inflation amid the implosion of an economy that was booming just six years ago.

With inflation in September now dipping to 8.48 per cent and the new president, Michel Temer, embarking on economic reforms to control spending and encourage investment, the bank has shifted gears.

But Brazil's rate is still far above Russia's 10 per cent and 6.25 per cent in India, among other emerging giants.

The new, market-friendly central bank governor, Ilan Goldfajn, is expected to oversee further rate cuts before the year ends.

"The Brazilian economy desperately needs lower interest rates," wrote Vinicius Torres Freire, economics editor at Folha de Sao Paulo newspaper, ahead of Wednesday's decision.

Brazil's lowest rates were 7.25 per cent during Oct 2012 to April 2013, when the economy was growing strongly.

The GDP dipped 3.8 per cent last year, and the economy is expected to shrink a further three per cent this year.

However, prices are finally retreating.

The central bank publication Focus is forecasting 7.01 per cent inflation for the end of 2016, falling to 5.04 per cent next year. The central bank's target is 4.5 per cent.

The bank said it will "evaluate the pace and magnitude of monetary easing over time to guarantee the inflation rate converges toward the target."

The recession has left 12 million Brazilians out of work, according to government statistics, and has seen the three main international rating agencies cut Brazil's credit to junk status.

Brazil has been hit hard by falling world commodity prices and a bitter political struggle that led to the impeachment of former president Dilma Rousseff, as well as a massive corruption scandal at the state oil company Petrobras.

Mr Temer, Ms Rousseff's replacement, is turning Brazil away from her leftist policies.

Last week, he pushed through a bill in an initial lower house vote that would cap government spending for 20 years.

The proposal's approval on its first vote was an important victory for the new president, who plans to enact labour and pension reforms next year.

He has warned of state "bankruptcy" if the country does not impose painful reforms.

AFP