Brazil cut its benchmark interest rate Wednesday for the 10th straight time to a record low 7.25 per cent, injecting extra stimulus into a languid recovery threatened by a worsening global economy.
The decision by the central bank’s monetary policy committee confirmed market bets for a 25 basis points cut over analysts expectations for a pause in the year-long easing campaign that brought rates to all-time lows. Five board members voted for the cut while three opted to keep rates steady.
The bank signalled that its decision marked the end of the easing campaign.
President Dilma Rousseff has made lower interest rates a top priority to revive the economy and cheapen the cost of credit to a rising middle class that pays, on average, about 36 per cent a year in interests for a loan. Even at its current record low, the Selic remains one of the world’s highest benchmark interest rates for a major economy.
However, lower rates have fuelled worries about rising inflationary pressures next year as well as a possible rise in loan defaults by over-indebted Brazilians.
The central bank said the committee considered inflation, the domestic recovery and complexity of the global outlook to make its decision.
“Considering the balance of risks for inflation, the recovery of domestic activity and the complexity involved in the international environment, the committee considers that the stability of monetary conditions for a sufficiently prolonged period is the most adequate strategy to guarantee the convergence of inflation to the target, even if in a nonlinear way,” the central bank said in its post-decision statement.
Worries over a worsening global economy and a slower-than-expected recovery at home had in the last few days increased uncertainty over the direction of monetary policy in the world’s No. 6 economy.
Under the leadership of Alexandre Tombini, the bank has led efforts to revive the moribund economy, slashing 525 basis points off the Selic rate in just over a year – the most aggressive easing cycle among major emerging-market economies.
The year-long campaign to lower rates coupled with a flurry of stimulus measures by the Rousseff administration have started to lift a struggling industry and keep consumer demand buoyant.
That recovery has stoked fears already-high inflation will accelerate further in coming years and force policy makers to hike rates as early as 2013.
Inflation rose above the median of expectations in September to mark its strongest jump for that month since 2003.
Although inflation is unlikely to get out of control, its current level of 5.28 per cent remains well above the centre of the target range of 4.5 per cent – plus or minus two percentage points.