Brazil Signals More Stimulus

Benchmark rate lowered for eighth time, to record 8%.

Brazil cut its benchmark interest rate for the eighth straight time and signaled it will continue to lower borrowing costs, as spillover from a global economic slowdown limits inflation risks.

Central bank board members voted unanimously yesterday to cut the benchmark Selic rate by a half-point to a record 8 percent, as forecast by all but three of 59 analysts surveyed by Bloomberg. In a statement almost identical to ones issued at their two previous meetings, policy makers said “fragility” abroad is having a “disinflationary” impact in the world’s second-biggest emerging market, providing little guidance about how much more stimulus they judge necessary to revive growth.

“It’s hard to see right now what the floor is for the Selic,” Jankiel Santos, chief economist at Espirito Santo Investment Bank, said by telephone from Sao Paulo. “They left the door wide open for more cuts.”

Board members led by bank President Alexandre Tombini have lowered borrowing costs by 4.5 percentage points since August to revive an economy that expanded an annualized 0.8 percent in the first quarter, less than half the pace of the U.S. The monetary stimulus, combined with tax cuts and increased lending by state banks, have so far failed to spur faster growth as indebted consumers facing a tougher job market cut back on spending.

Before yesterday’s decision traders were betting on at least a quarter point cut at the bank’s next meeting in August, according to Bloomberg estimates based on interest rate futures contracts. Santos said he expects a half-point reduction next month to be the bank’s last though sees room for more stimulus if evidence of a stronger recovery from a contraction in the third quarter of 2011 doesn’t emerge.

The three other economists surveyed by Bloomberg were expecting a cut yesterday of 0.75 percentage point, a quarter point and no change.

Brazil’s economy will grow 2.01 percent this year, its second-worst performance since 2003, according to a central bank survey of economists published this week. That is the slowest expected growth among the nine largest economies in the Western Hemisphere, according to analysts surveyed by Bloomberg.


Economic Activity

Brazil’s seasonally adjusted economic activity index, a proxy for gross domestic product, fell 0.02 percent in May, the central bank said today in a report posted on its website. The median estimate from 26 economists surveyed by Bloomberg was for a decline of 0.4 percent. The non-seasonally adjusted index rose 1.09 percent from a year ago, more than the 0.25 percent increase forecast by 24 analysts.

President Dilma Rousseff’s government received more bad economic news this week after the national statistics agency reported that retail sales fell 0.8 percent in May, the most in more than three years. The broader index, which includes the sale of vehicles benefitting from tax breaks, fell 0.7 percent.

While inflation in Latin America’s biggest economy is slowing, dipping below 5 percent in May for the first time in 20 months, investor confidence is being shaken by signs that Brazil’s credit-led growth model has run its course after helping lift 40 million people out of poverty since 2003.

The consumer default rate in May rose to 8 percent, a 30-month high, while the share of household income used to service debt stands at 22 percent, double the level in the U.S.

A strong labor market, which has underpinned growth over the past decade, also seems to be faltering. While unemployment in May was at a record low for the month of 5.8 percent, the economy generated 45 percent fewer jobs than a year ago.

Industry has been the hardest hit, as slumping global demand offset potential gains from a weaker currency that makes Brazilian goods cheaper. Manufacturing payrolls fell 1.7 percent in May from a year ago, the eighth straight such decline and the worst performance since December 2009.

Volvo AB became the latest company to announce layoffs, saying on July 4 that it was cutting 208 jobs at its truck plant in Curitiba, Brazil. General Motors and Daimler AG’s Mercedes-Benz are also seeking to slow output at their Brazilian assembly lines.

Even after yesterday’s rate cut Brazil still has the third-highest real interest rate among the Group of 20 nations, after Russia and China, meaning policy makers have more firepower to fight the effects of Europe’s debt crisis and a slowdown in China, its biggest trading partner.


Half-Point Cuts

The slower-than-expected recovery should allow policy makers to maintain the pace of interest rate reductions at half-point intervals, a government official familiar with the bank’s deliberations said last week on the condition of anonymity.

John Welch, macro strategist at CIBC World Markets, the investment-banking branch of Canada’s fifth-largest bank, said additional monetary easing is unlikely to contribute much to the economy and may worsen inflation dynamics in the future.

“It will not help growth and they will have to reverse themselves after forcing the Selic too low,” he said in a text message from Sao Paulo.

In the short-term, weak growth is helping to contain inflation risks even amid a world-beating slide in the currency that could increase the cost of imports. The real has lost 10.3 percent against the U.S. dollar over the past three months, the most among the 31 major currencies tracked by Bloomberg.

While inflation has remained above the bank’s 4.5 percent target since August 2010, it slowed to 4.92 percent in June and is forecast by economists to fall further in coming weeks. Tax breaks on cars and other goods helped drive prices lower in three of nine categories last month.

The yield on interest rate future contracts maturing in January 2014, the most traded in Sao Paulo today, fell one basis point, or 0.01 percentage point, to 7.63 percent at 9:04 a.m. local time. The real fell 0.5 percent to 2.0463 per U.S. dollar.


Bloomberg News


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