Brazil Lowers Interests to 19.50%. Right Drug, Wrong Dosage, Say Critics

“Evaluating that the monetary policy elimination at this time does not jeopardize the achievements obtained in the combat against inflation”, according to a note released by Brazil’s Monetary Policy Committee (Copom), that authority decided, unanimously, to lower from 19.75% to 19.50% a year, the Selic.

The Selic is used as a reference rate for the interests Brazilian banks charge their customers.


The rate reduction, by the Copom, is the first since September 2004. One year ago, the committee toughened the monetary policy starting periodical increases in the interest rate. From September 2004 to May 2005, the Selic was raised from 16% to 19.75%.


In its latest minutes, published at the end of August, Copom promised to follow, attentively, how prices would behave in order to define which steps to take this month. The document pointed to a likely reduction in the Selic acknowledging a “benign scenery” for the general evolution of inflation.


According to the Copom, the fall in the National Index of Consumer Prices (IPCA) for three consecutive months (from June to August) contributed to draw the market scene near to the 5.1% inflation target for  2005.


The definition of basic interest rate takes into account the inflation forecast for the next 30 days and the momentary trends of fall or rise in the economy prices. There is also a monthly analysis of the national and international situation, encompassing activity level, evolution of the monetary state of affairs, public finances, payments balance sheet, exchange rate market, international reserves, money market, open market operations and general expectations for macroeconomic variables.


Positive


The Rio de Janeiro Industries Federation (Firjan) deemed positive the Copom’s decision. In a note released soon after the announcement, Firjan stated that “the Copom’s decision to reduce the Selic rate is the right answer to the monetary policy results, which evidenced that the inflation is on target and under control”.


The organism that represents Rio’s industrial sector added, however, that lowering interests is not enough. The country needs urgent structural reforms.


“It is important to stress that the continuity of this process of interest rates reduction to compatible levels with similar economies will depend on the fast advancement of structural reforms,” says the note.


The Firjan recommends that “these reforms should become a priority for the Executive and the Legislative, lest the country be stuck into a non sustainable growth standard.”


Wrong Dose


The president of the Union Force (Força Sindical), Paulo Pereira da Silva, released a note stating that  the Copom “prescribed the right medicine but made a mistake in the dosage, which is inadequate to give the economy a boost”.


According to the note, the new 19.5% rate, is “only a momentary relief”. And “this gradualism excess, result of a clumsy economic policy,  is very harmful for workers and the productive sector”.


The Union Force’s note ends stating that “this extremely timid decision for the economy will certainly corrode even more the patience of workers, who are already living dark times due to a government that has been anesthetized with corruption charges”.


ABr

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