Brazil cut its benchmark interest rate for the eighth straighttime and signaled it will continue to lower borrowing costs, asspillover from a global economic slowdown limits inflationrisks.

Central bank board members voted unanimously yesterday to cutthe benchmark Selic rate by a half-point to a record 8 percent, asforecast by all but three of 59 analysts surveyed by Bloomberg. Ina statement almost identical to ones issued at their two previousmeetings, policy makers said “fragility” abroad is having a“disinflationary” impact in the world's second-biggest emergingmarket, providing little guidance about how much more stimulus theyjudge 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 formore cuts.”

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

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

The three other economists surveyed by Bloomberg were expectinga cut yesterday of 0.75 percentage point, a quarter point and nochange.

Brazil's economy will grow 2.01 percent this year, itssecond-worst performance since 2003, according to a central banksurvey of economists published this week. That is the slowestexpected growth among the nine largest economies in the WesternHemisphere, according to analysts surveyed by Bloomberg.

Economic Activity

Brazil's seasonally adjusted economic activity index, a proxyfor gross domestic product, fell 0.02 percent in May, the centralbank said today in a report posted on its website. The medianestimate from 26 economists surveyed by Bloomberg was for a declineof 0.4 percent. The non-seasonally adjusted index rose 1.09 percentfrom a year ago, more than the 0.25 percent increase forecast by 24analysts.

President Dilma Rousseff's government received more bad economicnews this week after the national statistics agency reported thatretail sales fell 0.8 percent in May, the most in more than threeyears. The broader index, which includes the sale of vehiclesbenefitting 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'scredit-led growth model has run its course after helping lift 40million people out of poverty since 2003.

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

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

Industry has been the hardest hit, as slumping global demandoffset potential gains from a weaker currency that makes Braziliangoods cheaper. Manufacturing payrolls fell 1.7 percent in May froma year ago, the eighth straight such decline and the worstperformance since December 2009.

Volvo AB became the latest company to announce layoffs, sayingon July 4 that it was cutting 208 jobs at its truck plant inCuritiba, Brazil. General Motors and Daimler AG's Mercedes-Benz arealso seeking to slow output at their Brazilian assembly lines.

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

Half-Point Cuts

The slower-than-expected recovery should allow policy makers tomaintain the pace of interest rate reductions at half-pointintervals, a government official familiar with the bank'sdeliberations said last week on the condition of anonymity.

John Welch, macro strategist at CIBC World Markets, theinvestment-banking branch of Canada's fifth-largest bank, saidadditional monetary easing is unlikely to contribute much to theeconomy and may worsen inflation dynamics in the future.

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

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

While inflation has remained above the bank's 4.5 percent targetsince August 2010, it slowed to 4.92 percent in June and isforecast by economists to fall further in coming weeks. Tax breakson cars and other goods helped drive prices lower in three of ninecategories last month.

The yield on interest rate future contracts maturing in January2014, the most traded in Sao Paulo today, fell one basis point, or0.01 percentage point, to 7.63 percent at 9:04 a.m. local time. Thereal fell 0.5 percent to 2.0463 per U.S. dollar.

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