The bank’s board, led by President Alexandre Tombini, voted unanimously yesterday to reduce the benchmark rate to 10.5 percent, as forecast by all 67 analysts surveyed by Bloomberg. In a statement identical to that after its two previous meetings, policy makers said “moderate adjustments” in the key rate will shield the world’s second-biggest emerging market from global turbulence without compromising their goal of lowering inflation to its 4.5 percent target this year.
Investors are today scrapping bets that the bank will slow its easing cycle at its next meeting in March, said Andre Perfeito, chief economist at Gradual Investimentos. The yield on the interest rate futures contract maturing in January 2013, the most traded in Sao Paulo today, fell 9 basis points, or 0.09 percentage point, to 9.990 percent at 11:07 a.m. Brazil time. Deeper cuts will reinforce concerns that Tombini will fail to tame inflation as the government tries to sustain 4 percent growth, he added.
“The market is going to price in a greater concern about inflation,” said Perfeito. “It’s obvious that they’re going to do another half-point cut and at least one more after that, which could be smaller.”
Perfeito today amended his forecast to include another quarter point cut in April, from his previous call they they would half the cycle in March.
Brazil has taken the lead among emerging markets in cutting borrowing costs as the economy shrank in the third quarter for the first time since 2009. The country’s surprise interest rate cut in August, the first in two years, has since been followed by policy makers in Russia, Indonesia, Chile and Israel.
The strategy has helped bolster consumer spending as Europe struggles to contain its debt crisis, reducing demand for emerging market assets. Early signs of a rebound prompted some economists to predict Tombini would soon shift his focus to inflation that was 6.5 percent last year, the fastest year-end reading since 2004.
Traders were split yesterday on whether the central bank would cut the benchmark rate by 25 or 50 basis points at their next policy meeting in March, according to Bloomberg estimates based on interest rate futures.
Even before yesterday’s statement, analysts had expected Tombini to fail in his pledge to bring inflation back to target this year and in 2013. Economists forecast that the central bank will reverse course next year and start raising rates again, as consumer prices rise 5.3 percent this year, and 5 percent in 2013, the bank’s Jan. 13 survey shows.
President Dilma Rousseff’s administration has cut taxes and eased restrictions on consumer credit to boost growth, though expects the majority of stimulus to come from monetary policy. Her Finance Minister, Guido Mantega, said last month that government will try to ensure the economy expands 4 percent this year.
Signs that growth has picked up since the third quarter won’t change the bank’s course of action, said Alberto Ramos, a senior Latin America economist at Goldman Sachs Group Inc. in New York. Brazil’s economic activity index, a proxy for gross domestic product, expanded at its fastest pace in 19 months in November, reversing a three-month contraction.
“The slight rebound in GDP is not strong enough for them to adopt a slightly more hawkish stance,” said Ramos in a phone interview. “The world is too risky and uncertain for them to signal right now they are about to change the pace.”
Consumer spending is being fueled by 18 percent credit growth and a record low unemployment rate of 5.2 percent. A surge in investment as Brazil prepares to host the 2014 World Cup and the government’s decision to raise some pension payments by 14 percent this year are also pumping cash into the economy.
Retail sales rose 1.3 percent in November, the fastest pace in 15 months. Cia. Brasileira de Distribuicao Grupo Pao de Acucar, the country’s biggest retailer, reported that same-store sales rose 8.5 percent in the fourth quarter from the year before, while shopping-center operator BR Malls Participacoes SA saw same-store sales rise 8.8 percent during the same period.
The interest-rate cuts have also helped fuel a 26 percent rally in the Bovespa stock index since the benchmark gauge hit a two-year low on Aug. 8.
To be sure, analysts will need to wait the release of the minutes to yesterday’s meeting on Jan. 26 to confirm that the bank will stick to its current plan, said Jankiel Santos, chief economist in Sao Paulo for Espirito Santo Investment Bank.
Economists in the Jan. 13 central bank survey forecast that the Selic will fall to 9.5 percent by the end of the year. Brazil’s inflation-adjusted interest rate of 4 percent is the highest in the Group of 20 nations.
The bank’s leeway for further cuts also depends on Rousseff’s ability to contain spending, Gustavo Rangel, chief Brazil economist for ING Financial Markets in New York, said by phone before the rate decision.
The government is expected to announce in the coming weeks a series of budget cuts that, if not big enough, could make it harder to meet its goal of delivering a budget surplus before interest payments equal to 3.1 percent of GDP this year.
Since Tombini’s first rate cut in August, economists have reduced their forecast for growth this year to 3.27 percent from 3.90 percent in weekly bank surveys. The International Monetary Fund forecasts growth of 3.6 percent this year, slower than Russia, China and India, the other so-called BRIC nations. In 2010, Brazil grew 7.5 percent, its fastest pace in two decades.
Brazil’s economy shrank 0.17 percent on an annualized basis in the third quarter, the first contraction since the collapse of Lehman Brothers Holdings Inc. in 2008, while industrial output has fallen for five of the last eight months.
The real appreciated 0.1 percent to 1.7658 per dollar.
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