A More Aggressive 75-Basis Point Interest Rate Cut in Brazil than Generally Expected

March 7, 2012

The Bank of Brazil’s monetary policy committee, COPOM, has implemented a fifth straight cut of its Selic interest rate, which at 9.75% is the lowest such has been since May 8, 2010.  275 basis points of a 375-bp tightening between April 2010 and July 2011 has now been reversed in five moves.  The first of those moves was done at end-August, and the first four changes including a fourth on January 18 of this year were 50 basis points in magnitude. 

Policymakers are damned if they do and damned if they don’t because inflation is excessive but growth is deficient and slowing.  CPI inflation averaged 6.6% last year and remains above 6.0% at 6.2% presently.  GDP expanded 2.7% on average last year, about a third as fast as in 2010, and by only 1.4% between the final quarters of 2010 and 2011.  Data out Wednesday showing a monthly 2.1% drop of industrial production and a 12-month 3.4% slump were even more dismaying to officials. 

The 50-basis point reductions had been decided unanimously, but two of nine policymakers objected to this week’s bigger 75-basis point easing.  The consensus of analysts after this more aggressive action is that COPOM isn’t through cutting interest rates.  When the current easing cycle ends, it’s quite plausible that the Selic rate will be even lower than the 8.75% low after the prior easing cycle was completed.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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