Brazil Cuts Key Interest to Record Low, But It’s Still World’s Highest

For the ninth time in a row in a process that started last September, Brazil’s Central Bank has lowered its Selic (Sistema Especial de Liquidação e de Custódia – Special System for Settlement and Custody), the overnight interbank rate.

The half percentage point reduction brings the benchmark rate to 14.75%, the lowest Brazil has seen in 10, 20 or 31 years depending on which source to believe among the differing reports in the Brazilian press.

Such low rate from a Brazilian perspective, however, would still be one of the highest if not the highest in the world. Among the 49 central banks tracked by the financial site Bloomberg the Brazilian one wins as having the costliest money.

Inspired by the American bank system Brazil created the Copom (Comitê de Polí­tica Monetária – Monetary Policy Committee), an organ of the Central Bank, in 1996.

The Committee became responsible for establishing the basic rate of interest (Selic) and keep inflation in check according to the wishes of the CMN (Conselho Monetário Nacional – National Monetary Council).

Copom has a nine-member board led Henrique Meirelles, who is the Central Bank’s president. All of the members voted in favor of lowering the interest and without bias, which means that there won’t be any change in the Selic until the Central Bank’s men get together again on August 29 and 30.

In the note released to the press, the Copom explained: "In continuing the flexibilization process of the monetary police started in the September 2005 meeting, the Copom decided by unanimity to reduce the Selic’s rate to 14.75% a year, without bias, and to follow the macroeconomic scenario until the next meeting in order to then define which steps to take in its monetary policy strategy."

Representatives of industry, commerce and workers all criticized the Central Bank’s cut as too timid and too tardy.

The Fiesp, São Paulo’s Industry Federation, issued a statement saying that Brazil’s low inflation would justify a deeper cut in interest than the one made by the Copom. "There is plenty for a bigger reduction of the Selic and only the Central Bank cannot see it," said the industry representatives noting that with an expected 3.8% inflation, the benchmark rate represents a 10.6% real interest rate.

For Força Sindical, an association of workers union, the reduction is not enough to stimulate the economy in order to create more jobs. "The job offer will increase only when there is a bigger growth of the economy. In order to grow you need plentiful and cheap credit," they assert in a note.

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