Brazilian Central Bank May Cut Interest Rate to Stem Recession

By Andre Soliani
Jan. 21 (Bloomberg) -- Brazil’s central bank will probably cut its benchmark interest rate today for the first time in 16 months in a bid to safeguard Latin America’s biggest economy from the deepening global recession.
Policy makers led by bank President Henrique Meirelles may lower the overnight rate to 13 percent from a two-year high of 13.75 percent, according to 23 of 47 economists surveyed by Bloomberg. Sixteen analysts expect a half-point reduction, while eight predict a full-point cut.
Brazil’s economy stalled in the last quarter of 2008, losing a record number of jobs last month as industry scaled back output, consumer demand declined and commodity prices plunged. The $1.3 billion economy has likely already begun to contract, according to estimates by banks including Banco BNP Paribus Brasil SA, JPMorgan Chase & Co. and Morgan Stanley.
The central bank “has room to implement a bold and swift cycle of interest rate cuts,” Marcelo Salomon, chief economist at Sao Paulo-based Unibanco, said in a telephone interview. “Rate cuts will help reverse the economic slowdown by the start of 2010.”
In response to the first simultaneous recession in the U.S., Europe and Japan since World War II, Brazilian President Luiz Inacio Lula da Silva has injected about $100 billion into the banking system and currency markets, cut $3.6 billion in taxes and on Jan. 12 pledged to take “all needed” steps to ensure 4 percent economic growth this year.
Deceleration
Economists covering Brazil’s economy say that Lula’s government will have to do more to meet the president’s growth target for 2009, according to a central bank survey of about 100 institutions taken Jan. 16 and published Jan. 19.
Gross domestic product will grow 2 percent in 2009, according to the survey, which would be the slowest pace since the 1.2 percent expansion in 2003, Lula’s first year in office. GDP expanded 6.8 percent in the third quarter of 2008 from a year earlier.
The country’s benchmark stock index and currency both tumbled in the second half of 2008 as evidence mounted that the global financial crisis would bring the Brazilian economy’s fastest expansion in a decade to an end.
The Bovespa stock index has fallen by almost half from a record high of 73,516.81 reached on May 20 while the real slid by more than a third from a nine-year high of 1.5600 per dollar reached on Aug. 1.
Exports, which helped fuel economic growth over the past five years, may drop for the first time in a decade this year on slumping demand and falling prices, according to Foreign Trade Secretary Welber Barral. The value of goods sold abroad in 2009 may tumble to $158 billion from $197.7 billion in 2008, he said on Jan. 15.