Wednesday, April 12, 2017

Brazil makes big cut to rates as inflation falls close to target

Brazil’s central bank has slashed interest rates by a full percentage point as Latin America’s biggest economy tries to recover from its worst recession on record.  The cut, which accelerated an easing cycle that began in October, was the biggest since the global financial crisis in 2009, with the central bank reducing the benchmark Selic rate from 12.25 per cent to 11.25 per cent.  “Inflation developments remain favourable,” the central bank said in a release. “Available evidence suggests a gradual recovery of economic activity during the course of 2017.”  The aggressive action by the central bank comes as the conservative government of President Michel Temer is seeking to spur a recovery through an ambitious reform programme that includes capping runaway fiscal spending and overhauling the pension system.  But the president, who was brought to power through the impeachment of his leftist predecessor Dilma Rousseff last year, is struggling with a sluggish recovery and corruption investigations into members of his ruling coalition.  The Supreme Court on Tuesday evening authorised investigations into scores of politicians, including eight cabinet ministers of Mr Temer’s government.  The big risks remain political and, in particular, that the government struggles to pass pension reform Capital Economics Brazil’s economy contracted 3.6 per cent last year after declining 3.8 per cent in 2015, leading to soaring unemployment.  “The big risks remain political and, in particular, that the government struggles to pass pension reform,” said Capital Economics in a research note.  However, the central bank’s interest rate cuts will come as good news for Mr Temer, analysts say. The central bank in its statement cited market forecasts that predicted benchmark interest rates would fall further to 8.5 per cent by the end of this year and remain at that level until the end of 2018.  The fall in rates were possible because inflation had plummeted by half over the past six months to levels close to the centre of the central bank’s target band of 4.5 per cent, plus or minus 1.5 percentage points.  The central bank backed forecasts contained in a weekly survey of economists that showed inflation finishing at 4.1 per cent this year and hovering at 4.5 per cent in 2018.  Some economists said they expected another 100bp cut at the central bank’s next monetary policy committee meeting in May.  “If the [monetary policy committee] changes the magnitude of rate cuts in the near term, it is more likely to be in the direction of higher rather than lower cuts,” said Alberto Ramos, a Goldman Sachs economist, in an analyst note.  Itaú Unibanco, the country’s largest private bank, followed up the central bank announcement by saying it would pass on the rate cut in full to customers with personal loans and overdrafts, or small businesses borrowing for working capital.  “We all want a scenario with sustainable economic growth . . . the acceleration of the cut in the Selic by the central bank is an important step in this direction,” said Roberto Setubal, Itaú’s chief executive.  Brazil’s banks are often heavily criticised by consumer groups and leftwing politicians for the high interest rates they charge, especially on personal loans, overdrafts and credit cards. 

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