Brazil lowers benchmark rate for eighth straight time to 8%
2012-07-12 14:25:27
Central bank board members voted unanimously on Wednesday to cut the Selic rate by a half-point to a record 8%. In a statement almost identical to ones issued at their two previous meetings, policy makers said “fragility” abroad is having a “dis-inflationary” impact in the world’s second-biggest emerging market.
Board members led by bank President Alexandre Tombini have lowered borrowing costs by 4.5 percentage points since August to revive an economy that expanded an annualized 0.8% in the first quarter, less than half the pace of the US The monetary stimulus, combined with tax cuts and increased lending by state banks, have so far failed to spur faster growth as indebted consumers facing a tougher job market cut back on spending.
Brazil’s economy will grow 2.01% this year, its second-worst performance since 2003, according to a central bank survey of economists published this week.
President Dilma Rousseff’s government received more bad economic news this week after the national statistics agency reported that retail sales fell 0.8% in May, the most in more than three years. The broader index, which includes the sale of vehicles benefiting from tax breaks, fell 0.7%.
While inflation in Latin America’s biggest economy is slowing, dipping below 5% in May for the first time in 20 months, investor confidence is being shaken by signs that Brazil’s credit-led growth model has run its course after helping lift 40 million people out of poverty since 2003.
The consumer default rate in May rose to 8%, a 30- month high, while the share of household income used to service debt stands at 22%, double the level in the US.
A strong labor market, which has underpinned growth over the past decade, also seems to be faltering. While unemployment in May was at a record low for the month of 5.8%, the economy generated 45% fewer jobs than a year ago.
Industry has been the hardest hit, as slumping global demand offset potential gains from a weaker currency that makes Brazilian goods cheaper. Manufacturing payrolls fell 1.7% in May from a year ago, the eighth straight such decline and the worst performance since December 2009.
Volvo AB became the latest company to announce layoffs, saying on July 4 that it was cutting 208 jobs at its truck plant in Curitiba, Brazil. General Motors and Daimler AG’s Mercedes- Benz are also seeking to slow output at their Brazilian assembly lines.
However even after Wednesday’s rate cut Brazil still has the third- highest real interest rate among the Group of 20 nations, after Russia and China, meaning policy makers have more firepower to fight the effects of Europe’s debt crisis and a slowdown in China, its biggest trading partner.
The slower-than-expected recovery should allow policy makers to maintain the pace of interest rate reductions at half-point intervals, a government official familiar with the bank’s deliberations said last week on the condition of anonymity.
In the short-term, weak growth is helping to contain inflation risks even amid a world-beating slide in the currency that could increase the cost of imports. The real has lost 10.3% against the US dollar over the past three months.