Loading ...Brazil Bank Cuts Most in 5 Years, Signals More Easing
Jan. 22 (Bloomberg) - Brazil’s central bank, which cut interest rates by the most in five years yesterday, signaled it’s ready to further reduce borrowing costs to safeguard Latin America’s biggest economy from recession.
Policy makers led by bank President Henrique Meirelles voted 5-3 to lower the overnight rate to 12.75 percent from a two-year high of 13.75 percent, surprising 41 of 49 economists who had predicted a smaller cut. The bank said it was “carrying out immediately a significant part” of a new easing cycle without “putting at risk the fulfillment of” its inflation target.
The bigger-than-expected cut comes after Brazil’s economy stalled in the fourth quarter as companies slashed a record number of jobs, consumer demand declined and commodity prices plunged. The $1.3 trillion economy has probably already begun to contract, according to estimates by banks including BNP Paribas, JPMorgan Chase & Co. and Morgan Stanley.
“The central bank was more aggressive than the market expected in response to a more pronounced economic slowdown than originally expected,” said Marcelo Carvalho, Morgan Stanley’s chief economist for Brazil.
Policy makers last cut interest rates 16 months ago. The last full-point reduction was in December 2003.
Stocks may rally today as investors react positively to the swift action by the normally conservative monetary committee, Tony Volpon, chief strategist at CM Capital brokerage in Sao Paulo, said in an interview with Bloomberg Television. The yield on the overnight interest-rate futures contract for delivery in July 2009 fell 16 basis points to 11.76 percent at 6:25 a.m. New York time.
State-run Banco do Brasil SA and private lenders including Banco Bradesco SA and Uniao de Bancos Brasileiros SA said they would pass along some of yesterday’s cut to borrowers. That’s likely to please President Luiz Inacio Lula da Silva, who had been pressing banks to lower borrowing costs, according to two union leaders who met with him this week.
Demand, Consumer Confidence
“The rate cuts will have an impact on demand and help revive business and consumer confidence,” said Eduardo Yuki, chief economist for BNP Paribas Asset Management in Brazil.
Brazilian bank-lending grew by 2 percent in November, the slowest pace since July, as the global credit crunch led to higher interest rates and borrowers avoided new debt on fears they would lose their jobs. The average annual interest rate Brazilian banks charged customers rose to 44.1 percent from 42.9 percent in October, the central bank said on Dec. 23.
In response to the first simultaneous recession in the U.S., Europe and Japan since World War II, Lula has injected about $100 billion into the banking system and currency markets, cut $3.6 billion in taxes and pledged to take “all needed” steps to ensure 4 percent economic growth this year.
Slowdown
Analysts say economic growth probably won’t reach Lula’s target. Gross domestic product will grow 2 percent in 2009, according to a central bank survey of 100 institutions published Jan. 19. That would be the slowest pace since the 1.2 percent expansion in 2003, Lula’s first year in office.
Carvalho is expecting no economic growth this year, though in a report this week he said that forecast may prove optimistic. GDP expanded 6.8 percent in the third quarter of 2008 from a year earlier.
“The Copom is likely to remain on the aggressive track,” Alvise Marino, an emerging markets economist at IDEAglobal in New York, wrote in an e-mail to clients after the rate decision.
The country’s benchmark stock index and currency both tumbled in the second half of 2008 as evidence mounted that the global financial crisis would bring the Brazilian economy’s fastest expansion in a decade to an end.
Stocks, Peso
The Bovespa stock index has fallen by almost half from a record high of 73,516.81 reached May 20 while the real slid by more than a third from a nine-year high of 1.5600 per dollar reached on Aug. 1.
Exports, which helped fuel economic growth over the past five years, may drop for the first time in a decade this year on slumping demand and falling prices, according to Foreign Trade Secretary Welber Barral. The value of goods sold abroad in 2009 may tumble to $158 billion from $197.7 billion in 2008, he said on Jan. 15.
Slowing economic growth has helped rein in consumer prices, opening room for interest rate cuts.
After exceeding the upper end of the central bank’s target in mid-November, annual inflation slowed to 5.9 percent in December, within the policy makers’ goal of 2.5 percent to 6.5 percent.
“The central bank needs to be vigilant against inflation risks stemming from a weaker real,” Shelly Shetty, a senior director at Fitch Ratings in New York, wrote in a report after the announcement. “Maintaining a credible monetary and exchange rate policy framework will be critical for Brazil to weather the unfavorable external environment.”
Monetary Easing
The local currency has fallen 29 percent against the dollar since September, more than all of the 16 most active currencies tracked by Bloomberg.
Yesterday’s aggressive cut shouldn’t “dramatically change” the outlook on monetary policy this year, said Marino. Carvalho said the pace of further easing would depend on whether the economic outlook stabilizes or continues to worsen.
Analysts estimate that the Selic rate by year-end will fall to the record low of 11.25 percent in place in September 2007, according to the median forecast in the most recent weekly central bank survey.
Brazil’s decision follows the start of monetary easing by policy makers in Mexico, Colombia and Chile, where inflationary pressures have also subsided.
After yesterday’s cut, Brazil’s real interest rates, which take inflation into account, fell to 6.85 percent, still the highest among 54 countries tracked by Bloomberg.
Futures Contract
The yield on the interest-rate future contract for January 2010 delivery, the most actively traded on Sao Paulo’s BM&F commodities and futures exchange, closed at 11.15 percent yesterday, the lowest since August 2007.
BNP Paribas, Barclays Capital, JPMorgan Chase and Morgan Stanley all predict Brazil will fall into a technical recession, as defined by two consecutive quarters of economic contraction, in the last quarter of 2008 and first of 2009.
Brazil lost 654,946 government-registered jobs in December, the most since 1999, the Labor Ministry said Jan. 19.
Retail sales, including vehicles and construction materials, fell 4.1 percent in November, the first annual decline in the index since it began in January 2003.
Source: Bloomberg.
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