Brazilian currency, the realRICARDO MORAES/Reuters
Brazil's central bank cut its key interest rate Wednesday to 11.50 per cent, in line with market expectations, as a deteriorating global economy and a sharp slowdown at home outweigh worries about high inflation.
In a unanimous vote, the central bank's monetary policy committee, known as Copom, trimmed the benchmark Selic rate by 50 basis points. That follows a similarly sized cut on Aug. 31 that many economists worried would further stoke inflation in an economy with a turbulent history of runaway prices.
Central bank chief Alexandre Tombini is seen walking a tightrope, trying to keep consumer demand alive while betting that at economic slowdown at home and abroad will ease inflationary pressures going forward.
"The Copom understands that to mitigate at this moment the effects coming from a more restrictive global environment, a moderate adjustment to the base rate is consistent with a scenario of convergence of inflation to the target in 2012," the bank said in a statement accompanying its decision.
The international outlook has worsened since the Aug. 31 rate cut, with no solution to the European debt crisis in sight. That has some economists thinking Brazil's central bank was right to start cutting rates when it did as a preventive measure in the face of a sharp economic downturn.
Other emerging-market countries, such as Mexico and Chile, are expected to follow in Brazil's footsteps, lowering interest rates as early as this year to counter the global slowdown.
Mr. Tombini, a soft-spoken technocrat who took the helm of the central bank in January, appears to be taking a calculated gamble that the global economic headwind will help pull inflation back toward the 4.5 per cent centre of the official target range in 2012.
Annual inflation Brazil, Latin America's largest economy, is currently running at a six-year high of 7.31 per cent, well above the 6.5 per cent ceiling of the official target range.
"It is clear that inflation within the official target range is not the bank's priority now. Economic growth is now the priority amid a turbulent international scenario," said Newton Rosa, chief economist with SulAmerica Investimentos.
A double-digit increase in the minimum wage next year and rising salary demands are likely to keep pressuring prices. If inflation overshoots the target ceiling this year, it would be the first time it has done so since 2003.
Twenty-two of 26 economists surveyed by Reuters predicted the size of Wednesday's rate cut, while four bet on a steeper cut.