Brazilian Interest Rate Cut

May 31, 2012

Brazil’s monetary policy committee, COPOM, reduced its key Selic interest rate to 8.5% from 9.0% late Wednesday.  Such was the seventh reduction in an easing cycle begun nine months ago from a peak of 12.5%.  These seven cuts totaling 400 basis points offset eight increases totaling 375 bps between April 2010 and July 2011, and have depressed Brazil’s interest rate to a record low, eclipsing the trough during the Great Recession.  Today’s vote was unanimous, and the 50-basis point size of the move was less than the prior two moves of 75 bps each in April and March.

A statement from COPOM reasserts that the risks to inflation at this time are “limited” and cites disinflationary external price risks.  Brazilian CPI inflation stood at 5.1% in April, which is within the 2.5 – 6.5% target range.  GDP growth has slowed from 7.5% in 2010 to 2.7% in 2011 and merely 1.4% between 1Q11 and 1Q12.  The government has put pressure on bank officials to respond to the weaker growth rate.  Unemployment is at 6.2%, and Brazil’s current account deficit equals about 2.6% of GDP.  The Brazilian real has dropped over 20% against the dollar during the past 12 months.  Brazilian officials first coined the term “currency wars.”

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

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