Brazil’s central bank signaled it will keep borrowing costs at a record low for an extended period as President Dilma Rousseff’s administration struggles to revive the economy amid slowing global growth.
In a split decision yesterday, the bank’s eight-member board cut the Selic rate by a quarter point to 7.25 percent, as forecast by 35 of 73 economists surveyed by Bloomberg. The bank said keeping monetary conditions stable for a “sufficiently prolonged period” was the best strategy for balancing inflation risks stemming from a recovery in domestic activity with continued “complexity” in the global economy. Three dissenting members favored leaving borrowing costs unchanged.
Economists were divided going into yesterday’s meeting, with some highlighting the need to keep a lid on inflation that quickened in September for a third month. Still, traders boosted bets on a final rate cut after board member Luiz Awazu Pereira last week compared the current global slowdown to Japan’s lost decade following the collapse of its asset bubble in 1990.
“Rates will stay at the current level for a long time, and a long time means at least a year,” Jankiel Santos, chief economist at Banco Espirito Santo Investment bank, said in a phone interview from Sao Paulo. Prior to the decision, Santos had expected the bank to begin raising rates by August 2013.
Spillover from Europe’s debt crisis and the need for fiscal consolidation in rich nations is sounding alarms throughout emerging markets, which have seen their growth outlook dim in recent weeks. The Bank of Korea today lowered its benchmark rate for a second time this year, to 2.75 percent from 3 percent, after the International Monetary Fund reduced its forecast for global growth this year to 3.3 percent.
A frenzy of policy action by Rousseff’s administration aimed at reviving Brazil’s $2.5 trillion economy -- the slowest- growing among major emerging markets -- has so far yielded mixed results.
While tax breaks are spurring record car sales and helping lift consumer confidence, industrial output in August fell short of economists’ forecasts. The central bank last month cut to 1.6 percent from 2.5 percent its forecast for growth this year, falling in line with private estimates that Finance Minister Guido Mantega as recently as June ridiculed as a “joke.”
“Domestically, there are signs of recovery, but nothing guaranteed,” Enestor Dos Santos, senior economist for Brazil at Banco Bilbao Vizcaya Argentaria SA (BBVA), said in a telephone interview from Madrid before yesterday’s decision.
To pump up the economy, policy makers led by bank President Alexandre Tombini have cut rates 525 basis points since August 2011, more than any Group of 20 nation. The extra stimulus is being cheered by Rousseff, who has made reducing some of the world’s highest borrowing costs a popular battle cry.
While yesterday’s statement suggests the easing cycle has ended, officials remain focused on growth even as price increases are forecast by economists to stay above the government’s 4.5 percent target until at least 2014.
Inflation quickened in September for the third straight month, to 5.28 percent, as food and beverage costs jumped the most since December 2010. The bank yesterday reiterated that inflation will fall to the target in a non-linear fashion.
Growth Trumps Inflation
Carlos Hamilton, the bank’s economic policy director and one of yesterday’s dissenters, said last month that inflation is unlikely to converge to the bank’s goal until the third quarter of 2013 because combating the price spike would dampen growth.
Brazil’s government has “shown that they have a priority on growth and that growth remains weak,” Bret Rosen, Latin America strategist at Standard Chartered Bank, said in a telephone interview from New York before yesterday’s decision. “As long as you don’t see inflation spike toward 6 percent, I think that they’re OK continuing with interest rate cuts.”
Some of Brazil’s biggest companies have seen demand slacken as a result of the slowdown. Vale SA (VALE3) said last week that it’s halting production of iron-ore pellets at three facilities, and a preliminary accord between Ternium SA (TX) and billionaire Eike Batista’s logistics unit LLX Logistica SA (LLXL3) to build a steel mill expired on Sept. 30 without a deal.
Before yesterday’s decision, traders in the interest-rate futures market were betting the bank would begin raising the Selic as early as April 2013, trading in swap rates indicates .
Pereira’s comments last week that the world may be heading to a “post-bubble Japanese outcome” followed remarks by Tombini that Europe’s debt crisis still lacks a solution and that a fragile global economy should remain disinflationary for the medium term.
“Directors gave a lot more weight to the external backdrop rather than the clearly less inflation-friendly domestic dynamics,” Alberto Ramos, an economist at Goldman Sachs & Co., wrote in a report yesterday.
Ramos said that in tandem with the bias in favor of lower rate, policy makers may use other tools to control the expansion of credit and perhaps let the real strengthen to anchor prices. The real has declined 8.6 percent in 2012, the biggest drop among the dollar’s 16 most-traded counterparts, as the central bank has stepped up purchases of dollars to aid exporters.
Mantega, in an interview yesterday from Japan, said measures to dissuade capital inflows have so far proven effective in shielding Brazil’s economy from the yield-seeking liquidity unleashed by the U.S. Federal Reserve’s third round of quantitative easing.