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After Another Cut Brazil Still Has Interests 3% Higher than Any Country

Brazilian monetary authorities hope the 11 will be the number that will do the trick. After ten consecutive cuts in the Selic – Brazil’s benchmark lending rate – without a visible improvement in the economy, the Brazilian Central Bank’s Monetary Policy Committee (Copom) has once again lowered the rate by 0.5% from 14.25% to 13.75%.

The cuts started in September of last year and since then interests have fallen a full 6%. At that first reduction in September the Selic lowered from 19.75% to 19.5%.

There was no surprise. The market was expecting this reduction, according to a report released earlier this week by Brazil’s Central Bank.

Despite the new cut, however, Brazil is still the world champion in high interest rates. Discounted the projected inflation for the next 12 months, the country will still have real overnight interbank rates of 9.3% a year.

Turkey, the second in the list of countries with the steepest interest rates, has a real rate of 6.2%. So, Brazil would need to cut more than 3% just to get rid of its number one position in the ranking.

Copom will still have a final meeting this year on November 28 when their members are expected to lower the Selic another 0.25%.

According to Getúlio Vargas Foundation’s (FGV) economist Salomão Quadros, a larger reduction in the Selic at this time, just 11 days before the presidential election might have been misinterpreted  putting the Central Bank’s reputation at risk.

"The Central Bank has already given proof of independence and is not going to run the risk of losing this reputation," said Quadros in a interview to Reuters.

As for inflation, experts are betting Brazil won’t exceed 3% this year and 4.2% in 2007. The official inflation target for 2006 is 4.5% with a tolerance margin of plus or minus two points.

Analysts also don’t fear any pressure on prices due to a heated economy. In the second quarter the country’s GDP was 1.2%. The Brazilian government has reduced its growth forecast from 4% to 3.5% for the year. But economists are expecting more like 3% or less.


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