Brazil Has Historic Chance to Cut Rates, Franco Says (Update1)

By Adriana Brasileiro
Feb. 13 (Bloomberg) -- Brazilian policy makers have a “historic opportunity” to cut benchmark interest rates to single digits this year as inflation eases and economic growth sputters, said former central bank president Gustavo Franco.
“It’s a completely new world that Brazil is ready to enter,” Franco, a partner at money-management firm Rio Bravo Investimentos, said in an interview in Rio de Janeiro. “It’s the moment for the central bank to show courage and chase this new paradigm.”
Central bankers lowered the overnight rate on to 12.75 percent on Jan. 21 from a two-year high of 13.75 percent. The reduction, the biggest since 2003, came after data showed Brazil’s economy is stalling as local demand slumps. The move left the rate within 1.5 percentage points of 11.25 percent, the lowest since Brazil adopted an inflation-targeting policy in 1999.
Economists forecast policy makers will cut the so-called Selic rate by 75 basis points to 12 percent at their next meeting March 10-11 and reduce the rate to a record low of 10.75 percent by year-end, according to the median estimate in a central bank survey published Feb. 9.
Brazil’s $1.3 trillion economy, the biggest in Latin America, has probably already began to contract, according to Banco BNP Paribas Brasil SA, JPMorgan Chase & Co. and Morgan Stanley. Marcelo Carvalho, Morgan Stanley’s chief economist for Brazil, and Alexandre Lintz, chief Latin America economist at BNP Paribas, said they expect no growth this year as the global financial crisis undercuts consumer demand and prices on the country’s commodity exports fall.
‘Wake Up the Economy’
Brazilian companies eliminated 600,000 jobs in December and industrial production slumped 14.5 percent that same month. The output decline was the most since at least 1992 and exceeded all 22 forecasts in Bloomberg survey of economists.
“The best instrument the government has right now is interest rates,” said Franco, who served as central bank president from 1997-1999 after helping craft the real currency plan that tamed hyperinflation in 1994. “Brazil has a wonderful opportunity now to use it and really wake up the economy.”
Carvalho revised his outlook this month for the benchmark rate to 9.75 percent at year-end from a previous forecast of 11.75 percent. He predicts four consecutive one-percentage-point cuts starting in March.
“Our call changed after we saw the rapid and sudden decline in activity,” Carvalho said.