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Brazil Cuts Interest Rates by 0.5%. Largest Reduction in 2 Years.

Brazil’s Monetary Policy Committee (Copom) of the Central Bank (BC) decided Wednesday, October 19, to lower the annualized benchmark interest rate (Selic) to 19%. The Selic is used by banks as a reference for determining the interest they charge. The reduction, from 19.5% to 19%, is the largest since 2003.

For a year the BC had been following a cautious monetary policy, with gradual monthly hikes in the rate. In September, 2004, the Copom, perceiving the threat of inflation, decided to raise the rate from 16%, where it had stood since April of that year, to 16.25%. According to projections made at the time, inflation was expected to overshoot the targets of 5.5% for 2004 and 4.5% for 2005.

Based on this prospect, the rate was raised again in October, by 0.25%. In both November and December, months in which consumption rises, due to Christmas shopping, the rate was lifted 0.5%, ending the year at 17.75%.

Between January and March of this year, the monthly increases continued in steps of 0.5%. In April the Copom concluded that the policy of raising interest rates as a way to combat inflation was producing results and decided to slow the pace, adding 0.25% to the rate, which rose to 19.5%.

Another 0.25% was added in May, and the rate remained at 19.75% until August. Last month, one year after the BC began its policy to force a retreat in inflation, the decision was made to embark upon a new course, this time through reductions in the Selic, which was lowered to 19.5% in September.

Agência Brasil

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