Brazil Bank Signals Key Rate Stable for Prolonged Time

(Corrects date of Mantega interview in sixth paragraph.)

Brazil’s central bank signaled it will keep interest rates at their current level for an extended period given favorable signs for the inflation outlook.

The rate-setting committee “assesses that the prospective scenario for inflation presents favorable signs and reaffirms its vision that inflation accumulated over 12 months is tending to converge toward the target, though in a non-linear fashion,” the bank said in the minutes to its Nov. 27-28 meeting published today.

The bank’s board, led by President Alexandre Tombini, voted unanimously last week to keep the benchmark Selic rate at a record low 7.25 percent, marking the end of the biggest easing cycle among the Group of 20 nations. Even as the world’s second- biggest emerging economy struggles to pick up speed, policy makers kept borrowing costs steady to ensure that inflation, which has been running above the 4.5 percent target for more than two years, doesn’t get out of hand.

The board, in a statement accompanying its Nov. 28 decision, pledged to keep monetary conditions stable for a “prolonged period” as the global economy remains adverse and domestic activity struggles to recover. Since August 2011, the central bank has cut interest rates by 525 basis points as President Dilma Rousseff reduced taxes, pressured commercial banks to lower rates and raised tariffs to help manufacturers.

‘Cocaine’ Rates

Brazil’s economy expanded in the third quarter at 0.6 percent, half the pace forecast by economists, as investment fell for the fifth straight period. As a result, economists in the central bank’s latest survey cut their 2013 growth forecasts to 3.7 percent from 3.94 percent. They forecast gross domestic product will expand 1.27 percent this year, less than the U.S. as well as Russia, India and China.

The government’s measures have set the stage for the economy to grow 4 percent in 2013, Finance Minister Guido Mantega said in an interview on Dec. 4.

“Lower interest rates, lower taxes and a more competitive exchange rate are the pillars of an economy that will start investing more,” Mantega said in his Brasilia office. “The economy was addicted to high interest rates. It’s an addiction almost like cocaine.”

Long-Term Rate

Mantega announced yesterday a reduction in national development bank BNDES’ long-term lending rate, known as TJLP, to 5 percent from 5.5 percent effective in January. BNDES will also extend for another year by 100 billion reais ($47.9 billion) an emergency credit line established during the 2009 credit freeze to fund the purchase of capital goods. Of the total, up to 15 billion in loans can come from private banks against deposits they’re required to hold at the central bank, he said.

Some indicators show the economy may already have bottomed out. Retail sales in September grew for the fourth straight month, and industrial production in October rose from the previous year for the first time since August 2011. Consumer confidence reached its highest level in November since December 2010.

Even as growth remains sluggish, policy makers are still battling higher consumer prices. Inflation accelerated to 5.64 percent in the year through mid-November, the fastest pace since February. Economists in a central bank survey last week forecast it will slow to 5.43 percent in 2013.

Tombini said in an interview last month that inflation will converge to the central bank’s target by the third quarter of next year though not necessarily in a linear fashion. Earlier in 2012 he repeatedly predicted it would reach the target by year- end.

To contact the reporters on this story: David Biller in Rio de Janeiro at; Matthew Malinowski in Santiago at

To contact the editor responsible for this story: Joshua Goodman at

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