Published by Minyanville

Brazil has cut interest rates by half a point in a widely expected move as its economy finally begins to slow. The Central Bank made its unanimous decision yesterday to cut the benchmark Selic rate to 11.5%, following August’s surprise drop to 12%.



Despite high inflation figures, growth appears to be top priority for policymakers.  “By timely mitigating the effects coming from a more restrictive global environment, a moderate adjustment in the level of the basic rate is consistent with the scenario of inflation converging to the target in 2012,” read a short statement from the Bank.

 

The target inflation figure is between 2.5% and 6.5% for this year. The expected figure for the year is slightly higher than the upper limit at 6.52%, according to Reuters, with annual inflation currently running at 7.31%. After last year’s whopping 7.5% growth, Brazil’s economy is expected by Goldman Sachs to have slowed to expansion of 3.5% at the end of this year though some predictions are as low as 3%.

 

Analysts are expecting further cuts in the near future. Tony Volpon, Managing Director at Nomura, believes that next year will see the rate fall to 9.5% before a rise back up to the current figure to close the year as inflation fails to meet targets.

 

Corruption Allegations

A fifth member of President Dilma Rousseff’s government is now coming under scrutiny for corruption. Popular magazine Veja accused Sports minister Orlando Sila this week of embezzling around $23m from ministry coffers over eight years.

 

Silva has denied the allegations. "There isn't and there won't be any proof of the lies presented," he said. However, there is much pressure on the minister to resign, as Rousseff’s government has to be seen to be dealing with bigger issues—specifically for the Sports Ministry, the World Cup in 2014, the Copa America in 2015 and the Olympics in 2016.

 

“Rousseff’s government has shed ministers like banana peels in the fewer than 10 months it has been in office,” writes Joe Leahy in the Financial Times. “[Rousseff] will be wanting the scandals to come to an end. If a house needs this much cleaning, then it must have been very dirty to begin with. Rousseff will have to take some blame for that because this is after all, her house.”

 

The president has been forced to take a hard line on corruption during her tenure, which has been seen by some as weak, especially in the wake of her predecessor Luiz Inácio Lula da Silva. However, there are signs public opinion is on the up. A recent poll gave Rousseff an approval rating of 71%, with voters pleased with her hard line on corruption as well as the country’s growing position in world affairs thanks to a powerful economy.

 

“She's done quite well,” David Fleischer, a political scientist at the University of Brasilia, told the LA Times. “She managed to turn around her first big challenge, the corruption scandals, and make it into a political victory.”  The president spent the week on her first tour of Africa though the trip has received little press attention outside the continent.

 

Rousseff, however, does not have a strong relationship with the country’s Congress making it difficult to undertake the reforms necessary to curb inflation, writes Brian Winter for Reuters. He continues to criticize Rousseff’s “ad hoc approach” to policy and the two, “taken together, … suggest a mounting risk in Brazil that business plans can be turned upside-down with little to no notice, if Rousseff's government finds it convenient.” Former president Lula’s predictable consistency in economic policy, helped make Brazil “a star among emerging markets,” claims Winter.

 

Europe Influence

German Chancellor Angela Merkel’s suggestion that the European debt crisis is nowhere near over earlier this week caused a sharp drop in the real, down from a one-month high to 1.7741 to the US dollar on Monday. The currency weakened further as the week wore on, finishing up at 1.7755 to the dollar on Wednesday just as the cut in interest rates was announced.

 

Should the crisis worsen, Brazil could face capital flight, according to IMF Executive Director Paulo Nogueira Batista Jr. “The four points that give the country an advantage in times of turbulence are its international reserves and its leeway with interest rates, the exchange rate and reserve requirements,” he told reporters in Paris.