Deteriorating Economy Leads Brazil to Cut Interest Rates by 1%

Brazilian currency, the real In a surprise move, Brazil's Central Bank (BC) decided today to cut by a full percentage point its key interest rate, the Selic. The reduction from 13.75% to 12.75% is the largest one in five years and wasn't anticipated by market analysts.

Apparently, the members of Copom (Monetary Policy Committee) opted for the aggressive measure, in Brazilian terms, after pondering that the Brazilian inflation is in check and weighing the impact of the international financial crisis on the Brazilian economy.

The decision wasn't unanimous. Three directors of BC voted for a smaller cut of 0,75 percentage point, which would leave interests rate at 13% a year.

On Monday, a survey from the Central Bank showed that most Brazilian financial analysts were expecting a 0.5% cut.  However, the announcement that 654,000 jobs had been lost in December, the worst number in 10 years, seem to have changed some minds among experts and inside the BC. 

At the end of the meeting, the Copom released the following note: "Evaluating the outlook for inflation, the Copom decided, at this time, to reduce the Selic rate to 12.75% a year, without bias, for five votes in favor and three votes for the Selic rate reduction of 0.75 percentage point.

"With that, the Committee begins the process of monetary policy flexibilization carrying out immediately an important part of the interests basic rate action, without losing sight of the inflation target."

Commenting on the cut, ratings company Fitch, which currently rates Brazil at BBB- with a Stable Outlook, released a note warning Brazil to be careful not to stoke inflation:

"Falling inflation and inflationary expectations as well as a sharper-than-expected deceleration in economic activity have provided BCB the flexibility to begin an early easing cycle with an aggressive cut. However, the central bank needs to be vigilant against inflation risks stemming from a weaker Brazilian real," said Shelly Shetty, Senior Director in Fitch's Latin American Sovereign Group. 

"The BCB's interest rate cut as well as its pro-active stance to ensure adequate liquidity in the financial system should provide some support to the faltering domestic demand outlook," Shetty added.

"Maintaining a credible monetary and exchange rate policy framework will be critical for Brazil to weather the unfavorable external environment and minimize the fallout from global recession, falling commodity prices and global de-leveraging," according to Shetty.

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  • Show Comments (5)

  • dnbaiacu

    Ch.c ?????????
    We are waiting Sir…. 🙂

  • João da Silva

    Ch.C
    [quote]In Brazil are mortgage rates reset automatically once a year like in Spain, or are mortgages rates fixed with the borrower maturity decision such as for 3-5-10-15-20-30 years like in the USA or most of Europe ?[/quote]

    I think this question was addressed to me. As I said a few months ago, the best bank to get a Mortgage is CEF (Caixa EconÀƒ´mica Federal). At that time you could get two kinds of Mortgage. One with Prefixed annual interest rate and the Second one is Post Fixed. In the first case the, if you borrow at the annual rate of say 14% , it remains the same during the mortgage period. In the second case, you borrow at 14% and after a year the rate changes (according to the inflation rate determined by the government). It may come down or go up (though I have never heard of it coming down!).

    I really do not know if the mortgage rate is going to come down even if the SELIC rate goes below 10%. There is an article that I am posting below that says that the by cutting down SELIC rate by 1%, the consumer credit has gone down [i]just[/i] by 0.08%. It is an interesting article and will help you in your analysis.

    [url]http://www.estadao.com.br/noticias/economia,queda-da-taxa-selic-nao-muda-crediario,311783,0.htm[/url]

    I look forward to hearing your opinion.

  • ch.c.

    Dnbaiacu and Joao !!!!
    Coincidence on 2009 year end SELIC rates estimates ?
    Today “Morgan Stanley economists now expect the central bank will cut the benchmark rate to 10.25 percent by year-end, a drop of 3.5 percentage points from the end of 2008. They previously estimated a 2 percentage-point reduction.”

    Hmmmmm ! 😉 😀

    But as said I would not be surprised at all of even lower rates than 10 % !
    That is why I would wish to have an answer on my question…to refine my analysis over the coming months !
    Thanks.
    😀 😉

  • ch.c.

    Simple…..
    The views of 100 Brazilians Economists surveyed by your own Central Bank just a few weeks ago….were for
    12 % by 2009 year end !

    My own views ?
    Lower than that. 10 % and eventually lower. Just go back to my written comments made on December 30 or 31 !

    And also remember what I wrote more than once, namely
    There is no way that mortgages rates of 13-15 % make sense in a 4-6 % inflation rate environment.
    Pure craziness. Pure suicide ! Real Estate Collapse guaranteeed…in my view. Big losses ahead for both the homeowners and the
    lenders having such rates.

    Just a few days ago…you could already read that Robbing Hook was preparing a plan to help low cost housing buyers with
    4-5 % subsidized mortgages rates for those earning less than Brl 2000.- per month.
    Just as crazy. Because healthy minds dont help poors getting richer over the years by allowing them to BUY real estate.
    Low cost housing are made for LOW RENTS…themselves governments subsidized. But at the end…NO CAPITAL GAIN…by definition !
    But the problem wont be here. It will be as said for those paying 13-15 %.

    Joao, why do you think I asked you the mortgages rates in Brazil a few months ago ? smiles

    Stupid question :
    In Brazil are mortgage rates reset automatically once a year like in Spain, or are mortgages rates fixed with the borrower maturity decision such as for 3-5-10-15-20-30 years like in the USA or most of Europe ?
    If reset automatically once a year…the problem is of course much lighter !

  • João da Silva

    [quote]We are waiting Sir[/quote]

    Rest assured that you don’t have to wait for too long. 😉

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