Brazil signals biggest G-20 rate cut near end on recovery

Brazil’s central bank signaled a yearlong easing of interest rates may have come to an end as record low borrowing costs start to revive the economy.

Led by bank President Alexandre Tombini, policy makers reduced the Selic rate yesterday by a half-point to 7.5 percent, as forecast by all 60 economists surveyed by Bloomberg. The eight-member board, in a statement accompanying its unanimous decision, said that if there is room for an additional adjustment, it “should be carried out with maximum parsimony.”

Goldman Sachs Group Inc. said the statement, coming as the inflation outlook worsens and tax breaks spur “strong” demand for durable goods, indicate that policy makers will probably leave the benchmark rate unchanged going forward. Over the past year, Brazil has reduced borrowing costs by 500 basis points, more than any other Group of 20 nation.

“The door to further interest rate cuts has basically been closed,” Flavio Serrano, senior economist at Banco Espirito Santo de Investimento SA, said in a phone interview from Sao Paulo. “The central bank is more confident the economy is recovering and can’t be careless about inflation.”

Since last August, Brazil has lowered borrowing costs nine times to revive economic growth that was half the annualized pace of the U.S. in the first quarter and is trailing Russia, India and China -- its peers in the BRIC group of major emerging markets.

Swap rates on the contract maturing in January 2014 rose 11 basis points, or 0.11 percentage point, to 7.85 percent at 9:12 a.m. in Sao Paulo. The real weakened 0.1 percent at 2.0528 per U.S. dollar.

Stimulus Working

President Dilma Rousseff’s administration has also cut taxes to spur the sale of cars and home appliances, incentives that were extended yesterday by as much as four months.

The stimulus may be taking hold. Retail sales jumped 1.5 percent in June, surprising analysts who underestimated the pace of buying by the most since 2008, and the central bank’s economic activity index rose that month at the fastest pace since March 2011. Vehicle sales surged to 364,196 units in July, the most since December 2010.

’Additional Deterioration’

While the bank hasn’t closed the door to an additional quarter-point cut in October, as traders are betting in the rate futures market, only an “additional deterioration” in the global economy will prompt further action, Goldman Sachs economist Alberto Ramos wrote in a report yesterday.

That’s because the inflation outlook is deteriorating. The pace of consumer price increases quickened for a second month in mid-August to 5.37 percent, as bad weather hurt crops in the U.S. and Brazil. The IGP-M, the broadest inflation index, rose 1.43 percent in August from the month before, the biggest increase since November 2010, the Getulio Vargas Foundation said today.

Economists surveyed weekly by the central bank have increased their forecast for year-end inflation for seven weeks in a row, to 5.19 percent. They expect inflation to quicken to 5.5 percent next year.

The central bank has blamed a supply shock stemming from the crop losses for the price increases. Tombini reiterated Aug. 17 that inflation will slow toward the bank’s 4.5 percent target by the end of the year even as growth picks up, adding that the convergence won’t be linear.

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