The BC, Brazil's Central Bank, lowered on Wednesday, July 22, the benchmark Selic rate by a half point to a record low 8.75%. The bank had cut the rate by at least a full point at all four previous policy meetings of 2009.
The action happens when performance of the Brazilian economy seems to be rebounding from its first recession in five years.
Brazilian domestic demand has been boosted by record low borrowing costs, lower taxes, an aggressive increase in government spending and generous support to Brazilian corporations with credit access difficulties.
"This level of the benchmark rate is consistent with a benign inflationary outlook, helping ensure the conversion of inflation toward the target, in a meaningful horizon, as well as a non-inflationary recovery of economic activity," said the Central bank release in support of the decision.
Annual inflation, as measured by Brazil's IPCA index, slowed to 4.8% in June, down from 5.2% in May and the lowest since March 2008. Policy makers last month reaffirmed that they seek to slow inflation to 4.5% by year-end.
Brazil's Central bank slashed the benchmark interest rate from a two-year high of 13.75% in December and injected about US$ 100 billion into money and currency markets to boost loans to companies and consumers amid the global credit crunch.
Brazil's total bank lending expanded to 1.26 trillion reais (US$ 662 billion) in May, a 20.5% increase over the same month a year ago. Loans as a percentage of GDP will expand to a record 45% by year-end, said last month Altamir Lopes, head of the Central bank's economic department, said last month.
Retail sales rose more than analysts expected in May, adding to evidence consumer demand has remained resilient. Sales increased 4% in May from the same month a year earlier according to a release earlier in the month from the statistics office.
Brazil's GDP contracted 0.8% in the first quarter of 2009 from the previous three months, after contracting a record 3.6% in the last quarter of 2008. The Central bank expects 2009 GDP growth of 0.8%, but the Organization of Economic Cooperation and Development anticipated a 4% expansion in a report released in mid July.
With growing signs of recovery and the massive liquidity injected to the economy, –as is happening in the US and UK–, there is also an underlying concern among economic agents that the Brazilian Central bank might be forced to begin raising the basic rate as early as the second quarter of 2010.