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Brazil Slashes Interests by 1.5% Fearing GDP Will Contract

Brazil real The central bank of Brazil slashed the Selic benchmark interest rate by 150 points to 11.25%, the most in five years. The vote was unanimous and follows a barrage of negative data about South America's largest economy.

The Brazilian central bank is seeking to revive growth as record job losses and plunging output force the government to review its growth target. Brazil's GDP, contrary to government estimates will contract in 2009 for the first time in 17 years.

"The central bank decision puts an end to the idea that Brazil's slowdown is just a transitional period," said Guilherme da Nóbrega, chief economist at Itaú Corretora, the brokerage arm of Brazil's largest bank. "Today's cut is in line with the widespread slowdown of Brazil's economy."

At the bank's January meeting, policy makers reduced the rate for the first time in 16 months to 12.75% as reports indicated the economy had come to a standstill. Since that meeting, unemployment jumped the most in seven years and industrial output plunged.

"The committee will monitor the prospective trajectory of inflation until its next meeting, taking into consideration the magnitude and speed of the basic interest rate adjustment already implemented and its cumulative effects, to then define its next monetary policy steps," said the bank's statement.

Itaú's Nóbrega predicts the lending rate will be cut to 9.5% by the end of the year.

The IBGE statistics institute said this week that Brazil's GDP contracted 3.6% in the fourth quarter from the previous period, the biggest drop since the series started in 1996.

Brazil's economy hasn't contracted in two straight quarters since the first half of 2003. The economy hasn't suffered an annual contraction since 1992, when it fell 0.5%, according to the IBGE.

EMBRAER, the world's fourth- largest aircraft maker, cut 20% of its workforce after the outlook for sales dropped. Automakers in Brazil have dismissed 7,800 workers since the crisis started, according to Anfavea, the country's automaker association.

Companies eliminated jobs in January, the first time in at least seven years that positions were cut in the first month of a year, after cutting a record 655,000 government-registered jobs in December.

Brazil's annual inflation rate slowed to 5.9% in February from a three-year high of 6.41% in October, said IBGE. Consumer prices rose 0.55% in February because of seasonal increases in school tuitions. The Brazilian Central bank has targeted an annual inflation of 4.5%, plus minus two percentage points.

Mercopress

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