Brazil to Cut Spending by $5.7 Billion to Cool Demand

Brazilian Finance Minister Guido Mantega said the government will cut spending by 10 billion reais ($5.7 billion) to cool the economy before the effect of interest rate increases can take hold.

Mantega, speaking to reporters today in Brasilia, also said that the spending cuts would not affect social programs or investment in infrastructure.

Policy makers last month lifted Brazil’s benchmark interest rate for the first time since September 2008 amid forecasts that Latin America’s biggest economy will expand at the fastest pace in a quarter of a century in 2010. Propelled by domestic demand, faster economic growth is stoking inflation that has exceeded the government’s 4.5 percent every month this year.

Cutting public spending “is a strong and quick tool to reduce the government’s demand,” Mantega said. “The advantage compared to other tools, is that it takes effect immediately -- when you raise the interest rate it takes four, five, six months to have an impact.”

The yield on the interest rate futures contract due January 2012, the most traded today on the Sao Paulo BM&F exchange, fell three basis points to 12.26 percent at 1:25 p.m. New York time.

“It is positive to use fiscal policy to help contain domestic demand,” Alexandre Schwartsman, chief economist at Banco Santander SA in Sao Paulo, told reporters today in Rio de Janeiro. “Quicker inflation is closely linked to the acceleration of demand beyond its limit.”

Schwartsman said the cut may be small given the speed at which the economy is expanding. “There are countries carrying out more vigorous fiscal adjustments,” he said.

The cut announced today, which will be detailed May 20, comes in addition to a 21.5 billion-real cut disclosed earlier this year, Budget Minister Paulo Bernardo told reporters today. The combined total of cuts announced this year amounts to about 1 percent of Brazil’s gross domestic product and still requires President Luiz Inacio da Lula Silva’s approval, Mantega said.

Central bank President Henrique Meirelles, speaking to reporters today in Rio de Janeiro, said any help from the fiscal side to contain inflation is “welcome.”

‘Chinese-like rate’

Brazil’s economy will grow at a faster, “Chinese-like rate” this year as the result of a stronger global economy and measures taken to stimulate domestic demand, Itau Unibanco Holding SA said in a report yesterday.

Mantega said the government will not allow the economy to continue to expand at a 7 percent pace over time. He said policy makers have the tools to keep the economy growing in a sustainable and balanced fashion.

“We can raise rates, cut spending and investment,” Mantega said. “We will reduce a bit government demand to prevent excessive growth,” he said at a later event today in Brasilia.

The central bank’s eight-member board, after keeping the benchmark rate at a record low 8.75 percent for nine months to boost economic growth, raised the Selic to 9.5 percent on April 28. The bank will further increase the rate to 10.25 percent in June, according to the median estimate in a May 7 central bank survey of about 100 economists.

Latin America’s biggest economy should expand 7.5 percent this year, above a previous estimate for 6.5 percent, Itau’s chief economist, Ilan Goldfajn, wrote in a May 12 report. Brazil’s biggest bank by market value also raised its estimate for economic growth next year to 4.8 percent from 4.6 percent.

The real rose 0.2 percent to 1.7713 at 1:32 p.m. New York time from 1.7741 yesterday.

To contact the reporter on this story: Iuri Dantas in Brasilia at idantas@bloomberg.net; Andre Soliani in Brasilia at asoliani@bloomberg.net

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