Central Bank of Brazil Implements Second Rate Cut Since End-August

October 19, 2011

Although expected, a second 50-basis point rate cut to 11.5% is not without controversy because inflation and credit growth now exceed their targets, expected inflation is climbing, and the labor market is comparatively tight.  Consumer prices rose 7.3% in the year to September versus a target range of 2.5 – 6.5%.  Credit and lending are more than 15% above year-ago levels, and projected inflation over the coming 12 months is at a 6-year peak.  The jobless rate has fallen 0.7 percentage points to 6.0% during the past year, and employment growth has been more robust than anticipated. 

COPOM, the monetary policy committee, nonetheless cut its Selic rate because growth is expected to be only about half as strong in 2011 as it was in 2010 and has lost discernible momentum since midyear.  A statement on the central bank website reads, “Dando seguimento ao processo de ajuste das condições monetárias, o Copom decidiu, por unanimidade, reduzir a taxa Selic para 11,50% a.a., sem viés. O Copom entende que, ao tempestivamente mitigar os efeitos vindos de um ambiente global mais restritivo, um ajuste moderado no nível da taxa básica é consistente com o cenário de convergência da inflação para a meta em 2012” and translates to “in response to the process of adjustment of monetary conditions, Copom decided unanimously to reduce the Selic rate to 11.50% p.a., without bias. The Copom believes that, in a timely manner to mitigate the effects of a global environment more restrictive, a moderate adjustment in the level of the basic rate is consistent with the inflation convergence scenario for the goal in 2012.”

COPOM also cut the Selic Rate on August 31 by 50 basis points.  The cumulative 100-basis point decline so far was preceded by eight increases totaling 375 bps between April 2010 and July 2011.  During the Great Recession, rate reductions totaling 500 bps from a peak of 12.75% were instituted during the first seven months of 2009.  It seems probable that COPOM will ease further.  The next and last meeting of COPOM this year will take place November 29030.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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