Brazil signals further actions after rate cut

Brasilia: Brazil cut its benchmark interest rate to a record low and signalled it will lower borrowing costs further as a fragile world economy contains inflation risks.

Policymakers led by bank president Alexandre Tombini voted unanimously to lower the Selic rate by a half-point to 8.5% on Wednesday night. Policymakers, in a statement, said that inflation risks are limited and that fragility abroad is having a disinflationary impact in Latin America’s biggest economy.

Brazil has cut borrowing costs by four percentage points since August, the most in the Group of 20 nations, to try and revive growth. The monetary stimulus and efforts to prop up spending through tax cuts have yet to kick in as the economy unexpectedly contracted in March after shrinking in January and February. A Thursday report showed industrial output shrank in April for the ninth time in 10 months.

“The statement increases the chances that interest rates will be cut to below 8%,” said Roberto Padovani, chief economist at Votorantim Ctvm Ltda.

While Padovani isn’t changing for now his call for two more quarter point cuts before the easing cycle ends, he said the bank left the door open for a half-point cut at its next meeting in July and more after that.

The yield on the interest-rate futures contract maturing in January 2013, the most traded in Sao Paulo on Thursday, fell seven basis points at 9.55am Brasilia time. The real weakened 0.1% to 2.0187 per US dollar.

Traders are already wagering the Selic will fall to at least 8% by August, according to Bloomberg estimates.

“The economy’s recovery from a contraction in the third quarter has been slower than expected,” Tombini said on 21 May. GDP likely expanded 0.5% in the first three months of the year, according to a Bloomberg survey of 46 analysts ahead of Friday’s first quarter growth report.

While low unemployment and increased credit have sustained demand, industrial output fell 0.2% in April and 2.9% from a year, the national statistics agency said on Thursday.

Economists are doubtful Brazil can spend its way back to faster growth, and in a central bank survey this week cut their forecast for 2012 growth to below 3% for the first time this year.

Dominic Carey and Daniel Grillo in Sao Paulo contributed to this story.

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