Brazil Cuts Interest Rate By Half-point, First In 3 Years

Brazil's central bank slashed its key interest rate by a larger-than-expected half-point Wednesday, making its first rate cut in three years as emerging economies start to turn toward monetary easing

Braslia, (UrduPoint / Pakistan Point News - 3rd Aug, 2023 ):Brazil's central bank slashed its key interest rate by a larger-than-expected half-point Wednesday, making its first rate cut in three years as emerging economies start to turn toward monetary easing.

The bank's monetary policy committee said its members had voted five to four to lower the benchmark Selic rate to 13.25 percent, kicking off an easing cycle long sought by leftist President Luiz Inacio Lula da Silva, who insisted high-interest rates were stunting the growth of Latin America's biggest economy.

The four dissenting votes -- unusual for the committee, which tends to vote unanimously -- were for a smaller, quarter-point cut, in line with most analysts' forecasts.

The committee "evaluated the alternative of reducing the benchmark interest rate to 13.5 percent, but considered it appropriate to adopt the pace of a 0.5 percentage point cut given the improving inflation situation," it said in a statement.

It said it was the start of a "gradual cycle of monetary loosening," and that its members "unanimously" anticipated another half-point cut "in the coming meetings," the next of which will conclude on September 20.

Finance Minister Fernando Haddad hailed the decision.

"Inflation is under control, we're planning for the economy's future. Investors, consumers, and families are going to be able to plan for a Brazil of fiscally, socially, and environmentally sustainable growth," he said.

"We are committed to fighting inflation and also to fiscal responsibility and the (monetary) adjustment that's being undertaken, which will get easier from here." Analysts had been split over whether the bank -- which is legally independent of the government -- would cut the key rate by a quarter or half a percentage point, though most had forecast the former, given the bank's hawkish history.

"The relatively dovish tone of the accompanying statement suggests that policymakers' inflation concerns are dissipating," consulting firm Capital Economics said in a note.

- Politically charged debate - Brazil's central bank had last announced a rate cut in August 2020, lowering the Selic to an all-time low of two percent in a bid to contain the economic fallout of the Covid-19 pandemic.

However, haunted by a history of hyperinflation, Brazil then went on one of the most aggressive monetary tightening cycles in the world, as the pandemic and then Russia's invasion of Ukraine sent global prices on an upward spiral.

From March 2021 to August 2022, the central bank rapidly raised the Selic to a six-year high of 13.75 percent, including three whopping hikes of 1.5 percentage points.

But Brazil's annual inflation rate has now eased from double digits to 3.16 percent, below the central bank's target of 3.25 percent.

Lula, who took over in January from far-right former president Jair Bolsonaro, had repeatedly berated central bank chief Roberto Campos Neto for holding off monetary easing, saying the high-interest rate was "irrational" and stunting Brazil's growth.

In the event, Campos Neto voted with the majority for a half-point cut.

Brazil's interest rate had been the world's highest in real terms, adjusting for inflation, according to financial research site MoneYou.

The Brazilian economy shrugged off recession fears to grow by a better-than-expected 1.9 percent in the first quarter of the year, boosted by a boom in the powerful agricultural sector.

Analysts polled by the central bank currently forecast economic growth of 2.24 percent for the year.

As inflation pressures start to ease worldwide, experts expect a series of rate cuts across emerging-market economies, even as central banks in the United States and Europe continue to tread cautiously.

Brazil's cut comes after Chile's central bank slashed its benchmark rate by a bigger-than-expected one percentage point Friday, its largest cut in 14 years.