Brazil Cuts Key Rate to Record Low to Jumpstart Economy

Mantega, Brazil's Finance Minister The Brazilian central bank on Wednesday slashed its interest rate for the 10th time since August of last year, to a record low of 7.25%, in a bid to stimulate the sluggish economy.

The bank’s monetary policy committee Copom announced the quarter-point reduction after the market closed and said the (divided) decision was made given inflationary risks, the domestic economy and global economic uncertainty.

Late last month, the central bank lowered its forecast for Brazil’s economic growth in 2012 from 2.5% to 1.6%, but is counting on that number to pick up next year.

The government of President Dilma Rousseff which has launched a series of stimulus measures this year is banking on 2% GDP growth this year — down from an earlier forecast of 3%, while market analysts are forecasting a 1.5% rise.

The world’s sixth largest economy showed clear signs of a slowdown in the first half of this year, expanding only 0.6% compared with the previous quarter. The Brazilian economy grew a paltry 2.7% last year, down from a strong 7.5% in 2010.

The central bank launched its rate cut strategy in August 2011, when the interest rate stood at a historic high of 12.5% and inflation, at 7.2%, exceeded the government’s target.

Brazil’s inflation rate over the past 12 months stands at 5.28%, driven by rising food prices. Analysts expect Brazil to close the year with an inflation rate of 5.2%, lower than the 6.5% registered in 2011 but higher than the official target of 4.5%.

The official release says that “Copom decided to reduce the Selic rate to 7.25% p.a., without a bias, by five votes in favor and 3 votes for keeping the Selic rate at 7.50% p.a.

“Considering the balance of risks for inflation, the recovery of domestic activity and the complexity surrounding the global environment, the committee understands that the stability of monetary conditions for a sufficiently prolonged period of time is the most adequate strategy to guarantee the convergence of inflation to target, even if not in a linear fashion.

“Voting in favor of the reduction in the Selic rate to 7.25% p.a. are the following board members: President Alexandre Antonio Tombini, Aldo Luiz Mendes, Altamir Lopes, Luiz Awazu Pereira da Silva and Luiz Edson Feltrim.

“Voting for keeping the Selic rate at 7.50% p.a. are the following board members: Anthero de Moraes Meirelles, Carlos Hamilton Vasconcelos Araújo and Sidnei Correa Marques.”

Mercopress

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