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Brazil Cuts Interest Rates on Growth Concerns
Dec. 01, 2011 08:50 GMT

Published by Minyanville

Brazil’s benchmark Selic rate is now at 11%, down 50 basis points, with authorities hoping that the crisis in Europe and a general global slowdown will curb inflation so that they can concentrate on growth.


“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,” read a statement -- identical to the last -- from the Central Bank who voted unanimously for the reduction.


The last few months have ratified Brazil’s shock decision in late August to cut rates for the first time in two years. That was down to a “substantial deterioration” in global markets, which have since continued to worsen. At the time, experts questioned whether Brazil was serious about tackling inflation and there were concerns that the Central Bank had bowed to political pressure from President Dilma Rousseff.


“I think it's a huge mistake. They gave in to political pressure,” Tony Volpon, Latin America strategist at Nomura in New York, told Reuters at the time. Now, Volpon expects the rate to continue to fall -- reaching 9% by the second quarter of 2012.


“We believe the Central Bank has confirmed that 50 basis points is the ‘moderate’ pace of cut they feel comfortable with, given current conditions,” read a statement from Volpon and George Lei, also of Nomura, on news of the cut. “Should external conditions deteriorate, the Bank would be ready to cut rates by 75 or even 100 basis points, in our opinion. The pace of rate cuts, therefore, will likely not only be data but also sentiment dependent.”


Many analysts have now exonerated Brazilian authorities for the August move. “Call it foresight, or simply good luck,” writes Samantha Pearson in the Financial Times, “but Brazil’s decision to start slashing interest rates back in August seems to have been the right move after all.”


Inflation


Inflation was the key issue then, having exceeded 7% in August. However, “the sharp deterioration in global markets since then has justified [Central Bank President Alexandre] Tombini’s decision, and nothing will stop him now,” continues Pearson.


Annual inflation has fallen recently, slowing in mid-November to 6.69%. The upper limit of the Central Bank’s target is 6.5% and inflation has not fallen below that since April.


If the inflation figure does exceed 6.5% this year, Tombini must write to Finance Minister Guido Mantega to explain the reasons and the recourse. This may be one stimulus for a recent change in accounting mechanisms for measuring inflation in Brazil.


The country’s National Statistics Agency this week released new weightings for certain items in its benchmark IPCA price index. These changes, claim Guilherme Figueiredo, hedge fund director at M. Safra & Co., will help authorities bring inflation down to the 4.5% target for next year as well as give the Bank more room to cut rates.


“[The reweightings] took weight from items that had bigger price increases,” Figueiredo said, adding that he believed them to be legitimate as they are based on changes in consumers’ spending habits.


With global markets in turmoil, inflation is less of a worry and the Bank can shift focus to growth.


Growth


The third quarter saw expansion at its slowest in two and a half years, with GDP up just 0.3% on the previous four months -- equivalent to annual growth of 1.2%, according to Finance Ministry estimates.


“Brazil is often one of the first economies to feel the effects of a weaker global environment,” Neil Shearing, emerging markets economist at Capital Economics in London, told Bloomberg. “The major driver of this slowdown in Brazil has been external factors, with weaker capital inflows, and weakening terms of trade.”


Since the August rate cut, analysts have reduced 2011 growth forecasts from 3.79% to 3.1% -- less than half of last year’s staggering 7.5%.


In order to boost growth, authorities are to announce steps to ease credit conditions and so boost consumption, according to Trade Minister Fernando Pimentel. Loan payment terms are likely to be lengthened as well as down payments eliminated for certain loans.


Chevron Accuses Brazil of ‘Overreaction’


Having received a temporary ban from drilling, a $28 million fine and facing criminal investigation for this month’s 2,400 barrel oil spill, Chevron (CVX) has accused the government of overreacting in a “puzzling manner.”


“I've never seen a spill this small with this size of reaction,” Ali Moshiri, who runs the company’s Latin American and African operations, told the Wall Street Journal. “This overreaction is puzzling us.”


The overreaction may be as a deterrent to other companies working in region, taking part in state oil company Petrobras’ (PBR) $225 billion investment plan.




More...

Brazil’s World Cup Raises Fear of Rampant Child Prostitution
Dec. 12, 2013 00:00 GMT


Maracana stadium is focus of football and protests in Brazil
Jul. 01, 2013 00:00 GMT


Brazil protests run gamut from health care to World Cup
Jun. 23, 2013 21:23 GMT


Brazilians angry over taxes, corruption take to streets
Jun. 18, 2013 18:30 GMT


Brazil’s Protests: Social Inequality and World Cup Spending Fuel Mass Unrest
Jun. 18, 2013 17:00 GMT


Brazil's growth has a monkey on its back
May. 29, 2012 11:15 GMT


Second Chevron oil spill in Brazil halts production
Mar. 16, 2012 17:25 GMT


Mixed Carnival for Brazil's Largest Companies
Feb. 23, 2012 13:40 GMT


Brazil and Mexico Look to Rewrite Auto Trade Pact
Feb. 06, 2012 21:15 GMT


Yet another minister resigns from Brazil government
Feb. 03, 2012 15:40 GMT


Brazil Prosecutors Move Forward in Chevron Oil Spill Case
Jan. 30, 2012 13:45 GMT


British Visit to Brazil Overshadowed by Falklands Dispute
Jan. 20, 2012 14:00 GMT


Brazil Pesticide Use Sends Orange Juice Prices to Record Highs as FDA Threatens Ban
Jan. 13, 2012 13:40 GMT


Brazil Overtakes UK, Looks Forward to 2012
Jan. 05, 2012 15:10 GMT


Chevron, Transocean Face $10 Billion Fine in Brazil Oil Suit
Dec. 16, 2011 08:40 GMT








© Girish Gupta