Brazil Interest Rate Cut as Growth Slows

By Lucy Jordan, Contributing Reporter

BRASÍLIA, BRAZIL – Brazil cut its benchmark Selic interest rate to a record low of eight percent Thursday, in an attempt to boost an economy that has continued to falter in the face of various stimulus measures. The 0.5 percent cut was the eighth consecutive reduction from the central bank’s monetary policy board (Comitê de Política Monetária), known as Copom, since August 2011, when the rate stood at 12.5 percent.

“The economy of Brazil is slowing in the short run as the government is tightening fiscal policy, commodity prices are falling, and global growth is faltering,” said W. Charles Sawyer, Professor in Latin American Economics at Texas Christian University. “They are trying to offset this slowdown by cutting interest rates to stimulate investment and consumption.”

Brazil’s economy has slowed significantly over the past year, growing just 2.7 percent in 2011, with a weak growth prediction of 2 percent this year – likely slightly lower than the United States. Other signs have been equally cool, with a fall in May retail sales and sliding industrial production.

Government fiscal policies in recent months have been heavily focused on stimulus, with R$8.4 billion in government purchases and tax-cuts for goods like appliances and autos.

One problem, experts say, is that much of Brazil’s growth has been based on consumer debt. Lower interest rates may ease the pressure on credit-reliant consumers, said Greg Weeks, political scientist and editor of academic journal The Latin Americanist, in an interview, but this won’t necessarily translate to higher spending.

“It is possible that consumers have reached a point where they are unwilling to increase their debt even when interest rates are cut.”

Not helping Brazil’s economic performance is the Eurozone crisis, as investors seek the relative safety of sovereign bonds, and a reliance on commodity exports to China.

Recent figures show Brazil losing ground to smaller emerging economics in the region. “Mexico still exports the vast majority of its goods to the United States,” said Mr. Weeks. “The Chinese economy is slowing down, whereas the U.S. economy—while still sluggish—is holding steady. Right now, that means Mexico is in a better position than Brazil for exports.”

Mexico’s outlook is strong, with a healthy manufacturing sector, and President-elect Enrique Pena Nieto promising financial reforms that would make the country more attractive to investors. Meanwhile, Brazil has slipped from the world’s number four destination for foreign direct investment to number five, according to figures from UNCTAD.

Regaining healthy growth, experts say, cannot be achieved simply through fiscal tweaks. Brazil suffers from “poor infrastructure, poor education, inefficient provision of basic government services, and structural impediments to growth,” said Mr. Sawyer. “The latter includes inefficient tax systems, over-regulation of business, and restrictive labor laws.”

What Brazil needs in the long-term, Ricardo Gottshalk, an economist and former Economic Adviser to São Paulo state government, said in an interview, is to “increase significantly investment in infrastructure to reduce bottlenecks, expand supply capacity and increase the country’s overall competitiveness.”

However, there are positive signs on the horizon. Last week saw new investment from two foreign companies, Singapore’s sovereign wealth fund Temasek and U.S. biopharma group Quintiles, suggesting that some investors remain optimistic over the country’s long-term prospects.

“The recent economic slow down has just helped international investors change their assessment and readjust their expectations about Brazil,” said Mr. Gottschalk. “They still see it with huge potential but their judgement is more tempered and their investment decisions more selective.”