Key Interest Rate Cut in Brazil Leads to Higher GDP Forecast

Brazil's real has been strong vis À  vis the dollar Brazil's Central Bank on Wednesday, June 6,  shaved 50 points of the Selic reference interest rate, which now stands at 12%, a historic low and in line with market expectations. The Monetary Policy Committee, Copom, admitted in a release that it was a divided decision with five board members supporting the 50 points cut and two favoring a more modest 25 points.

This was the sixteenth consecutive time the Selic basic rate is cut since Brazil's Central Bank begun in September 2005 to distend the strict monetary policy. Besides this latest 50 points reduction also signals a new approach since until now all cuts were in the range of 25 points.

According to a brief release from the bank, the decision was adopted following an assessment of the macroeconomic scenario and inflation prospects. Copom is scheduled to meet again July 17/18.

Actually inflation in the last quarter was below the bank's target helped by a strong appreciation of the local currency, which favors imports.

In recent statements Central Bank chairman Henrique Meirelles admitted that interest rates in Brazil still were "too high" but also recalled that when he took office in 2003, inflation was in the range of 20% annually and has now dropped to 3%.

"Brazil has suffered a long period of bad surprises concerning inflation. This is one of the reasons why interest rates, somehow, are still too high," said Meirelles.

Brazil's Central Bank is under strong pressure from local industry, retailing and certain political groups that are insistently lobbying for lower interest rates.

However Meirelles anticipated that as the Brazilian economy picks up speed, rates will continue to drop. The IMF growth estimate for Brazil this year is 4.4%, but analysts are reviewing the figure upwards. The central bank is working on an estimate of 4.1%, which is higher that the 3.8% of last December.

"Fundamentals are there, GDP growth is reacting positively as a direct consequence of greater consumption confidence, stability and investment," said Meirelles.



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