Brazil's Mysteriously Timed Interest Rate Cut

Who sets interest rates in Brazil: Is it Central Bank President Alexandre Tombini or the country’s President, Dilma Rousseff? That question hung over financial markets after the Central Bank of Brazil cut the benchmark Selic interest rate by half a point, to 12 percent, on Aug. 31. The move was unexpected: The bank’s rate-setting committee had ratcheted up the Selic at its five previous meetings to combat inflation and had not signaled a change in its stance. Yet Rousseff in an Aug. 30 radio broadcast had said rates should begin to fall as the government curbs spending.

The abruptness of the shift in monetary policy left money managers such as Guilherme Figueiredo, director of M. Safra, a São Paulo investment firm, with the impression that Tombini had caved in to political pressure. “This is the worst possible decision our central bank could have made at such a moment,” Figueiredo says. “The loss of credibility is going to be large.” Rousseff’s press office declined to comment when asked about the rate decision.