Brazil’s central bank cut borrowing costs by half a point for a third straight meeting as a global economic slowdown threatens to exacerbate a slump in domestic demand.
The bank’s board, led by President Alexandre Tombini, today voted unanimously to reduce the benchmark Selic rate to 11 percent from 11.5 percent, as forecast by 64 of 65 analysts surveyed by Bloomberg. One analyst predicted a full-point cut.
Policy makers said that “by timely mitigating the effects coming from a more restrictive global environment, a moderate adjustment in the level of the basic rate is consistent with the scenario of inflation converging to the target in 2012,” according to their statement posted on the central bank’s web site. The language in today’s statement was unchanged from the bank’s Oct. 19 decision.
Brazil has taken the lead among emerging markets in trying to prevent spillover from Europe’s sovereign-debt crisis. The country’s surprise interest rate cut in August, the first in two years, has since been followed by ones in Australia and Israel. Traders are betting Tombini will cut the Selic rate as low as 9.25 percent by July, according to interest-rate futures.
“The external crisis is more prolonged, and the data from the domestic economy came in below expectations,” Solange Srour, chief economist at BNY Mellon ARX Investimentos, said in a phone interview from Rio de Janeiro before the decision.
While the bank’s focus has shifted from the fastest inflation in six years to shoring up economic growth, Tombini has quashed bets that he would accelerate rate cuts. Last week, he said that the global slump had not yet led to an “extreme event” and repeated his forecast that “moderate adjustments” would be sufficient to address any fallout in Brazil.
In addition to lowering rates, Brazil has unwound most of the credit curbs it imposed last December to stave off a bubble in vehicle, personal and payroll loans.
More than $3 trillion has been wiped off world stock markets this month, as yields on Italian and Spanish sovereign debt rose to Euro-era highs. Brazil’s benchmark Bovespa stock index has fallen 2.6 percent this month and is down 25 percent this year in dollar terms.
Falling industrial output and business confidence to levels unseen since 2008 are weighing on investor sentiment in Latin America’s biggest economy. Since Tombini’s first rate cut, economists have reduced their forecast for growth this year 11 times, to 3.1 percent from 3.79 percent, according to weekly central bank surveys. Last year, Brazil grew 7.5 percent, its fastest pace in more than two decades.
‘One of the First’
“Brazil is often one of the first economies to feel the effects of a weaker global environment,” said Neil Shearing, an emerging markets economist at Capital Economics Ltd. in London. “The major driver of this slowdown in Brazil has been external factors, with weaker capital inflows, and weakening terms of trade.”
Annual inflation in Brazil slowed for a second straight month in mid-November, easing to 6.69 percent, in line with the central bank’s forecast that consumer prices peaked in the third quarter. Inflation has exceeded the 6.5 percent upper limit of the central bank’s target range since April.
Tombini said last week that inflation rates will “fall sharply” by the second quarter of next year. The central bank has repeatedly pledged to slow the annual rate to 4.5 percent by the end of 2012.
Even as the economy shows signs of cooling, 18 percent annual credit growth and full employment conditions continue to stoke consumer demand.
Brazilian companies had a “somewhat negative earnings season” in the third quarter as a weaker real raised debt service costs on foreign currency debts, said Carlos Firetti, an analyst at Banco Bradesco SA, in a Nov. 29 note to clients.