Brazil sig­nals key rate to stay at min­i­mum for record pe­riod

The Pak Banker - - Front Page -

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.

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