Bloomberg reported that Brazil reduced its benchmark interest rate for the 10th straight time as government officials increase stimulus to spur economic growth in the world's second largest emerging market.
Policy makers led by central bank President Mr Alexandre Tombini cut the Selic rate by a quarter percentage point from its previous record low to 7.25%, as forecast by 35 of 73 economists surveyed by Bloomberg. Thirty eight analysts forecast no change. The bank board voted 5 to 3 to cut the rate.
Policy makers said that "Considering the balance of risks for inflation, the recovery of domestic activity and the complexity surrounding the global environment, the committee understands that the stability of monetary conditions for a sufficiently prolonged period of time is the most adequate strategy to guarantee the convergence of inflation to target, even if not in a linear fashion."
President Mr Dilma Rousseff's administration has expanded policy actions aimed at reviving the USD 2.5 trillion economy, which is growing at the slowest pace among major developing countries.
While tax breaks have spurred retail sales, August's industrial production fell short of economists' forecasts and central bank officials have said they are willing to prioritize economic growth over inflation.
Mr Enestor Dos Santos, senior economist for Brazil at Banco Bilbao Vizcaya Argentaria SA, said that "The external scenario continues to be very turbulent. Domestically, there are signs of recovery, but nothing guaranteed. Since the beginning of this administration, government officials have been clear in their goal of cutting the Selic rate."
Swap rates on the contract maturing in January 2013, the most traded in Sao Paulo, rose one basis point to 7.11%. The real fell 0.3% to BRL 2.0422 per USD.
In the past year, policy makers have pushed commercial banks to lower lending rates, cut bank reserve requirements and announced plans to reduce power costs to revive economic activity. Last week, finance minister Mr Guido Mantega said the government will provide incentives to carmakers that buy parts from domestic producers and meet investment requirements.
The stimulus measures have been slow to lift Latin America's largest economy out of a yearlong slump. While industrial production rose 1.5% in August 2012, representing the third straight monthly increase, economists expected a 2% jump. Brazil's September 2012 trade surplus was smaller than analysts expected, as exports and imports fell.
Brazilian leaders have expressed alarm over the international economy. Last week, central bank director Mr Luiz Awazu Pereira said the global economic slowdown will last longer than expected, adding that the world may be heading to a post bubble Japanese outcome.
Mantega, who coined the term currency war in 2010 to describe the use of monetary policy by industrialized nations to boost exports, has warned of negative economic effects from the latest round of monetary easing. He has said policy makers stand ready to keep Brazil's currency from appreciating, which would make local manufacturers less competitive.
Concerns about the struggling economy will prevent policy makers from meeting the central bank's 4.5% inflation for the second year in a row.
According to the latest central bank survey of about 100 analysts, economists increased their 2012 year end inflation forecasts for the 13th week in a row, to 5.42%.
Source - Bloomberg
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