Policy makers, in the minutes to their Oct. 9-10 meeting published today, said that stable monetary conditions for a “sufficiently prolonged” period is the most adequate strategy for reviving growth without jeopardizing its inflation target.
The bank’s board, led by President Alexandre Tombini, voted by a 5-3 margin last week to cut the benchmark Selic rate 25 basis points to a record low 7.25 percent. Even as Brazil’s inflation quickened for the third straight month, policy makers reduced borrowing costs for the 10th straight time amid warnings that a worsening global economic scenario could slow a recovery in the world’s second-largest emerging market.
“They expect the recovery to take very long to happen,” said Gustavo Rangel, chief Latin America economist for ING Bank NV, in a telephone interview from London. “It is going to be a very slow, unremarkable process. I think they are committed to not hiking the Selic at least through the end of next year.”
The majority of the board said the inflation outlook is being affected by a short-term spike in food and beverage prices, though it remains favorable in the longer term, providing room for a “final” adjustment in rates, according to the minutes.
Since August 2011, the central bank has lowered the benchmark rate by 525 basis points, more than any other nation in the Group of 20, as President Dilma Rousseff has cut taxes and raised tariffs to help manufacturers and spur consumption.
Some indicators show that Brazil’s economy may be regaining its footing. Retail sales rose for the third month in a row in August on tax cuts and low borrowing costs, causing the stocks of companies including online retailer B2W Cia. Global to Varejo to trade higher. Brazil’s seasonally adjusted economic activity index, a proxy for gross domestic product, rose in August at the fastest pace since March 2011.
Still, consumer default levels in August remained at the highest level in almost three years. Vehicle sales in September fell 31 percent on the month and 7.6 percent from a year earlier, and industrial output in August missed economists’ forecasts. Earlier this month, central bank board member Luiz Awazu Pereira compared the current global scenario to Japan’s “lost decade” following the collapse of its asset bubble in 1990.
The board, in today’s minutes, said that the global economy remains fragile and the outlook for growth in emerging markets has becoming challenging as a result.
That view on growth has outweighed policy makers’ concerns over inflation, which accelerated last month at the fastest pace since February, to 5.28 percent. Inflation has remained above the mid-point of the central bank’s target for the last two years, and analysts in the latest central bank survey forecast that it will end 2013 at 5.42 percent. Brazil targets inflation of 4.5 percent plus or minus two percentage points.
“They are much more willing to accept inflation being more volatile and above target than they used to,” Tony Volpon, head of emerging market research for the Americas at Nomura Securities, said in a telephone interview from New York. “Given how complicated everything is around the world, you have to be more flexible in the way that you manage inflation target. They have been saying, ’We have a duel mandate. One is the inflation target, the other is maintaining financial stability.’”
Central bank director Carlos Hamilton said last month that inflation will probably not converge to the midpoint of the target range until the third quarter of next year. Hamilton was one of three board members to vote against a rate cut, arguing that the inflation outlook didn’t allow additional action.