Brazil Makes Biggest Lending Rate Cut in 5 Years

By THE ASSOCIATED PRESS
Published: January 21, 2009
Filed at 8:22 p.m. ET
SAO PAULO, Brazil (AP) -- Brazil's central bank issued its biggest interest rate cut in five years Wednesday, slashing its benchmark rate to 12.75 percent amid signs that growth in Latin America's largest economy may be slowing to a virtual halt.
Policy makers slashed the so-called Selic rate by 1 percentage point to its lowest since March 2007, when Brazil enjoyed a boom that ended abruptly with the global economic crisis late last year.
The cut was Brazil's first since September 2007, and its biggest since December 2003, when the Selic was clipped to 16.5 percent from 17.5 percent. Economists surveyed by the bank predicted that it will continue cutting the rate this year, bringing it to 11.25 percent by 2010 to stave off rapidly slowing growth and rising unemployment.
Industry and labor leaders across the country have clamored for lower rates to spur lending and production and slow layoffs.
But union members, who protested by the thousands on Sao Paulo's streets ahead of the bank's decision, criticized its move as too conservative, demanding a 2 percentage point cut instead.
''A reduction of 1 percent isn't much,'' said Artur Henri, head of the Central Workers Congress.
One of the nation's top big business lobbies, the National Confederation of Industry, called the cut ''rational and pragmatic,'' the Agencia Estado news service reported.
Brazil's economy shed 654,000 jobs in December, more than any month since May 1999. Unemployment reached 7.6 percent in November, and December's jobless rate is due to be announced on Thursday.
Economists surveyed by the central bank have revised their 2009 growth forecasts to 2.5 percent from 4 percent in recent months. Some analysts predict an even greater slowdown as the world economic crisis stalls demand for the commodity exports on which many Brazilian companies rely.
Exporters of everything from cars to minerals to food have been laying off employees, while others have sent workers on paid vacations and idled plants because Brazilian labor laws make firings too costly.
Despite the country's slowing growth, the central bank's monetary policy committee had resisted cutting rates amid spiraling prices. Recent data shows price gains have eased, with inflation now expected to dip to 4.9 percent in 2009, according to economists surveyed by the bank.
Brazilian politicians and economists have said a significant rate cut would encourage Brazilians to spend more on homes and consumer goods, boosting the economy.
''Maintaining a credible monetary and exchange rate policy framework will be critical for Brazil to weather the unfavorable external environment and minimize the fallout from global recession, falling commodity prices and global de-leveraging,'' said Shelly Shetty, senior director with Fitch Ratings' Latin American Sovereign Group.
Five of the monetary policy committee's eight members voted for Wednesday's 1 percentage point cut, while three favored a reduction of 0.75 percentage points, the central bank said in a statement.