Brazil signals key rate to stay at minimum for record period

BRASILIA

Brazil signaled it plans to keep its benchmark rate at a record low for the longest period in history to prop up an economy heading toward its worst two-year performance in a decade.

Policy makers last night kept the Selic rate at 7.25 percent, ending the second-longest streak of reductions in an effort to prevent inflation from accelerating. The unanimous decision, which was forecast by all 75 economists surveyed by Bloomberg, took into account the “the balance of risks for inflation,” the board said in its statement, which was almost identical to last month’s announcement.

Central bankers led by President Alexandre Tombini reiterated their intent to keep rates steady for a “prolonged period” as they try to keep inflation within their 2.5-to-6.5 percent target range without derailing the economy’s recovery. Economists surveyed by the central bank forecast that the Selic will remain unchanged through 2013.

“Interest rates are at a level that allow for the economy to rebound at a pace moderate enough to contain inflation below the upper range of the target,” Marcelo Salomon, cohead for Latin America economics at Barclays Plc, said in a phone interview from New York. “The idea is to leave interest rates at a minimum for as long as possible.”

Brazil’s economy will post average economic growth of 2.23 percent a year in the 20112012 period, according to the median forecast in a central bank survey published this week. That would be the slowest two-year average since the 1.91 percent pace of 2002-2003.

Slower growth has failed to tame inflation, which accelerated to the fastest pace in nine months in mid-November and has remained above the central bank’s 4.5 percent target for more than two years.

Consumer prices, as measured by the IPCA-15 index, rose 5.64 percent in midNovember from 5.56 percent the previous month, and will remain above the target through at least next year, the central bank survey shows.

In addition to reducing borrowing costs by 5.25 percentage points over the previous 10 meetings, President Dilma Rousseff’s administration has cut taxes, increased public spending and freed up billions of reais in credit to bolster a recovery that remains uneven.

In the aftermath of the 2008 collapse of Lehman Brothers Holdings Inc., the central bank kept the key rate at a record low 8.75 percent for nine months to boost growth.

“Economic growth has been moderate, and inflation is still worrisome for the central bank because it is still above target,” Fernando Fix, chief economist at Votorantim Asset Management, said in a interview. “The economy has started to show signs of recovery, and the central bank is signaling that it’s important to keep an eye on inflation risks.”

Economists surveyed by the central bank expect growth to more than double next year, to 3.94 percent. Retail sales rose for the fourth straight month in September, and tax breaks that were extended twice already led car sales to jump 19 percent in October from the previous month. Still, industrial output fell in September for the first time in four months on a drop in machine and equipment investments. While a government report on Nov. 30 is likely to show that gross domestic product growth accelerated in the third quarter to the fastest pace in more than a year, economists surveyed by the bank have reduced their forecast for 2013 in each of the past two weeks.

Growth this year shouldn’t surpass 1.5 percent, the same survey shows. Tombini is forecasting that falling wholesale prices will help bring inflation back to its target by the third quarter of next year.