Led by bank President Alexandre Tombini, policy makers reduced the Selic rate yesterday by a half-point to 7.5 percent, as forecast by all 60 economists surveyed by Bloomberg. The eight-member board, in a statement accompanying its unanimous decision, said that if there is room for an additional adjustment, it “should be carried out with maximum parsimony.”
Goldman Sachs Group Inc. said the statement, coming as the inflation outlook worsens and tax breaks spur “strong” demand for durable goods, indicate that policy makers will probably leave the benchmark rate unchanged going forward. Over the past year, Brazil has reduced borrowing costs by 500 basis points, more than any other Group of 20 nation.
“The door to further interest rate cuts has basically been closed,” Flavio Serrano, senior economist at Banco Espirito Santo de Investimento SA, said in a phone interview from Sao Paulo. “The central bank is more confident the economy is recovering and can’t be careless about inflation.”
Since last August, Brazil has lowered borrowing costs nine times to revive economic growth that was half the annualized pace of the U.S. in the first quarter and is trailing Russia, India and China -- its peers in the BRIC group of major emerging markets.
Swap rates on the contract maturing in January 2014 rose 11 basis points, or 0.11 percentage point, to 7.85 percent at 9:12 a.m. in Sao Paulo. The real weakened 0.1 percent at 2.0528 per U.S. dollar.
President Dilma Rousseff’s administration has also cut taxes to spur the sale of cars and home appliances, incentives that were extended yesterday by as much as four months.
The stimulus may be taking hold. Retail sales jumped 1.5 percent in June, surprising analysts who underestimated the pace of buying by the most since 2008, and the central bank’s economic activity index rose that month at the fastest pace since March 2011. Vehicle sales surged to 364,196 units in July, the most since December 2010.
While the bank hasn’t closed the door to an additional quarter-point cut in October, as traders are betting in the rate futures market, only an “additional deterioration” in the global economy will prompt further action, Goldman Sachs economist Alberto Ramos wrote in a report yesterday.
That’s because the inflation outlook is deteriorating. The pace of consumer price increases quickened for a second month in mid-August to 5.37 percent, as bad weather hurt crops in the U.S. and Brazil. The IGP-M, the broadest inflation index, rose 1.43 percent in August from the month before, the biggest increase since November 2010, the Getulio Vargas Foundation said today.
Economists surveyed weekly by the central bank have increased their forecast for year-end inflation for seven weeks in a row, to 5.19 percent. They expect inflation to quicken to 5.5 percent next year.
The central bank has blamed a supply shock stemming from the crop losses for the price increases. Tombini reiterated Aug. 17 that inflation will slow toward the bank’s 4.5 percent target by the end of the year even as growth picks up, adding that the convergence won’t be linear.
The statement “raises the bar in terms of the scenario required for future rate cuts,” Alvaro Vivanco, a Latin American strategist in New York for Banco Bilbao Vizcaya Argentaria SA (BBVA), wrote in an e-mail response to questions. “The debate will now shift towards the timing of a potential initiation of hikes.”
Brazil will begin raising borrowing costs in March, according to Bloomberg estimates based on interest rate futures.
To be sure, a slowdown in China, the No. 1 market for Brazil’s exports, and Europe’s debt crisis continue to weigh on the economy. Industrial output in June fell 5.5 percent from a year ago, indicating that the tax breaks are failing to spur sufficient demand by indebted consumers. Capital goods production, a barometer of investment, fell 15.3 percent in June from a year ago, further straining a sector of the economy that has lost 10,000 jobs since October.
Economists surveyed weekly by the central bank have cut their 2012 growth forecasts to 1.73 percent from 3.23 percent in May. After expanding 0.2 percent in the first quarter, gross domestic product probably expanded 0.5 percent in the April-June period and 0.7 percent from a year ago, according to the median estimates of economists surveyed by Bloomberg ahead of an Aug. 31 report. Last year Latin America’s biggest economy expanded 2.7 percent.
Among the companies being hurt is Sao Paulo-based Cia. Siderurgica Nacional SA (CSNA3), the country’s third-biggest steelmaker, which posted its first quarterly loss in 10 years in the second quarter on a fall in sales and a writedown in the value of its stake in Usinas Siderurgicas de Minas Gerais SA.
“The economy is starting to show the first signs of recovery,” Fernando Fix, chief economist at Votorantim Asset Management in Sao Paulo, said in a telephone interview before the central bank decision. “But it’s still fragile.”