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Brazil Cuts 0.5% in Key Interest Rate. ‘Too Little,’ Say Workers and Employers.

It came as a surprise for many Brazil Central Bank’s latest cut on the Brazilian annualized benchmark interest rate, the Selic in what is the last intervention in the key rate before the October 1st presidential election.

The country’s Monetary Policy Committee (Copom) announced Wednesday night, August 30, that it was reducing the Selic by 0.5%, from 14.75% to 14.25%. Experts were expecting a smaller reduction.

The Copom presented its decision in a short note in which it stated that its members had taken the decision to make the cut "after evaluating the macroeconomic scene and the inflation outlook." The decision was taken unanimously by all Copom’s members.

The cut, the 11th since the Central Bank started a gradual and repeated reduction of the Selic in September 2005, brought the  key rate from a high of 19.75% a year.

Alexandre Mathias, chief economist of the Unibanco Asset Management, said that he was surprised: "Although there is still some room for cuts, the tone of the last minute suggested the adoption of a more cautious posture."

From now on it is expected that the Central Bank will slow down the interest rate reduction. Experts believe that by year’s end the Selic will be between 13.75% and 14.50%.

The Copom’s action was received with criticism by representatives of the workers unions and the employers associations.

The president of the National Confederation of the Industry (CNI), Carlos Eduardo Moreira Ferreira, for example, released a note lambasting what he considered the timidity of the Central Bank gesture:

"The contained rhythm of the economic activity and the projections by a growing number of analysts that the inflation targets for 2006 and 2007 will be easily met allow us to conclude that the real interest rates are still in an excessively high level". Ferreira believes that the economy cannot grow with this kind of interest rate.

The CUT (Unified Workers Federation) seems to agree:  "The Copom remains insensitive to the workers’ appeals" and the reduction announced today "is timid". What we need, the workers association says, is "accelerated development, more and better jobs and an increase in investments in social policies."

Força Sindical, another union entity, laments that the cut wasn’t of 1% or more. They reasoned:  "A smaller rate would ease the salary campaign of about 3.3 million workers in the country."

Canindé Pegado, the CGT’s (Worker’s General Confederation) president used a more colorful language to describe his disappointment:  "The Copom’s decisions have been the Brazilian companies’ grave," He warns that if things continue the way they are new layoffs as the one at Volkswagen will spread creating more unemployment.

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