Brazil central bank surprises Dilma, nation with rate cut

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Brazil central bank surprises Dilma, nation with rate cut
BRASILIA (BDCi) – Although the Brazilian central bank’s cutting of the national interest rate 50 basis points or .5% last Wednesday was big news, it was even bigger news to Dilma, the country’s president.
According to Reuters sources, she was taken aback by the size of the rate reduction made by the central bank.
“This was a surprise for us, too,” a source close to the president said in describing her reaction. “We thought it would be unchanged, or they (the central bank) would cut by 25. No one expected 50.”
The central bank will release the minutes from its August 31st committee meeting where it made the rate adjustment to the public Thursday. Many in the public and private sector in Brazil are eagerly awaiting this documentation to understand the drastic move.
The “selic” rate was cut .5% to 12%, and officials close to the decision told Reuters that the central bank reacted to a forecast with “ugly data”. The reports mentioned contained many data points suggesting that the global economic slowdown is having and will continue to have a likewise severe impact on business in Brazil.
The same officials said that the central bank is now working with a 3.5% annual growth assumption, less than half of last year’s growth and below most private sector estimates. The thinking is that with a coming economic contraction, interest rates must be lowered significantly to reduce the burdens on consumers and to prime investment which would offset negative effects of a recessive trend.
Many analysts feel that the move may have been premature and will actually stoke inflation which is already at an annual high 7.2%.
President Rousseff has often stated that she would like to see interest rates in Brazil run at levels consistent with the developed world. From all reports, it appears that this was not the way she envisioned rates moving in the downward direction.

By Don Weinstein
Source: Reuters and Yahoo
Photo courtesy of stockmarketdigital
8 September 2011
1:00a.m. P.D.T.

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