Brazil Says Global Slowdown Allows for Moderate Rate Cuts

Brazil’s central bank said slowing global growth will have a large enough disinflationary impact on Latin America’s biggest economy to allow policy makers to carry out “moderate” cuts to interest rates.

The bank, in the minutes to its Oct. 18-19 meeting, said it sees “declining risks” of missing its 4.5 percent inflation target next year. The inflation rate fell to 7.12 percent in mid-October, the first decline in 14 months, though it remains above the 6.5 percent upper limit of the government’s target range.

“Even with a moderate adjustment in the basic rate, the inflation rate in the relevant horizon is positioned near the 2012 goal,” the bank said in minutes. The report was published hours after European leaders agreed to expand a bailout fund to stem the region’s debt crisis, easing concern that the global economy is heading for recession.

Policy makers cut the benchmark interest rate a half point for a second straight meeting last week, to 11.5 percent, to protect Brazil from turmoil that has wiped more than $6 trillion from world stock markets since the end of July. The central bank is betting that weaker growth in Europe, the U.S. and China will offset the stimulus provided by lower borrowing costs and curb the fastest inflation in six years.

The yield on the interest rate future contract maturing in January 2013, the most-traded in Sao Paulo today, rose four basis points, or 0.04 percentage point, to 10.37 percent at 8:12 a.m. New York time. The real strengthened 1.4 percent to 1.7350 per U.S. dollar.

Half-Point Cuts

The bank’s repetition of the phrase moderate adjustments, and a central scenario showing inflation converging to the target next year, is a signal that policy makers plan to keep cutting rates in half point increments, said Zeina Latif, a senior economist with RBS Securities Inc. in Sao Paulo.

“We thought they could eventually leave the door open for accelerating the pace, but they did not do that,” Latif said in a telephone interview from Sao Paulo.

Traders are betting on an additional 1.25 percentage point of rate cuts by March, according to Bloomberg estimates based on interest rate futures. Recent data show growth and inflation are slowing faster than expected, bolstering bank President Alexandre Tombini’s case for rate cuts.

Slowing Inflation

Consumer prices rose 7.12 percent in mid-October from a year earlier, down from 7.33 percent in mid-September. The central bank said the inflation outlook had “accumulated favorable signs” since its August meeting.

Economists covering Brazil cut their 2012 inflation forecast for the first time in eight weeks, to 5.6 percent, in the most recent weekly central bank survey. Analysts also dropped their forecast that Brazil will miss its inflation target this year.

The central bank published a “base scenario,” which assumes that the world economic turmoil has an impact on Brazil a quarter as strong as the 2008 crisis, allowing inflation to slow to 4.5 percent next year.

“These minutes show a central bank much more confident in its strategy of cutting rates amid this environment of strong risk aversion,” said Luciano Rostagno, chief strategist at Banco West LB SA, said in a telephone interview from Sao Paulo. Rostagno expects the central bank to cut its benchmark rate to 11 percent at its next meeting, and to 10 percent next year.

In the reference scenario, which assumes a benchmark interest rate of 12 percent, and in the market scenario, which assumes that the central bank cuts its benchmark rate in line with economists’ forecasts, inflation will exceed the 4.5 percent goal next year, the minutes show.

Labor Market

The central bank said that a “tight” labor market would continue to propel demand during the global economic slowdown. Wage increases incompatible with increases in productivity are a “very important risk” for inflation, the minutes said.

Brazil’s jobless rate was unchanged in September at 6 percent, the national statistics agency reported today. Economists had forecast it would fall to 5.8 percent, according to the median estimate of 41 analysts surveyed by Bloomberg.

The economic activity index, a proxy for gross domestic product, contracted 0.53 percent in August from the month before, its biggest monthly drop since the global financial crisis of 2008. August retail sales fell the most since March 2009, while industrial production registered its third decline in five months.

Growth in the world’s seventh-biggest economy will slow to 3.3 percent this year from 7.5 percent in 2010, according to the median forecast in the most recent central bank survey.

After reading the minutes, Solange Srour, chief economist at BNY Mellon ARX Investimentos, said the central bank may cut the interest rates by an additional 150 to 200 basis points, from an earlier forecast of 100 to 150 basis points.

To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Matthew Bristow in Brasilia at mbristow5@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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