Bank of Brazil Policymakers Elect to Cut the Selic Rate for a Tenth Time

October 11, 2012

The monetary policy committee, Copom, reduced its main Selic interest rate to a record low of 7.25% from 7.5% late Wednesday and released a statement that underscored the difficulty of policymaking in a period of excessively weak economic growth but also higher inflation.

Considering the balance of risks for inflation, the domestic activity recovery and the complexity that surrounds the international environment, the Committee understands that the stability of monetary conditions for a sufficiently long period of time is the most adequate strategy to guarantee the convergence of inflation to the target, even in a non-linear way.

Analysts are inferring that this will probably be the last of ten rate cuts totaling 525 basis points since August 2011 but also that a year may pass before officials attempt to re-tighten.  The 8-person committee was narrowly split (five for and three against) in agreeing to cut the Selic rate one more time, and the 25-basis point size of the move was smaller than the nine previous reductions. 

Brazilian inflation has accelerated from 4.9% at midyear to 5.28% at the end of 3Q12, which is a three-year peak.  With a history of hyperinflation, officials can ill-afford to ignore this trend.  At the same time, real GDP growth slowed from 7.5% in 2011 to 2.7% last year, and the IMF just cut its forecast for 2012 to 1.5% from 2.5% predicted three months ago.  The projected growth rate next year was reduced as well to 4.0% from 4.7%.  Monetary policy is coordinating with fiscal stimulus to assure that activity picks up rather than stumble into outright recession.

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

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