UPDATE 2-Brazil slashes rates by 150 bps as economy slumps

Wed Mar 11, 2009 7:29pm EDT
(Adds commercial bank rate cuts and analyst comments)
By Ana Nicolaci da Costa
BRASILIA, March 11 (Reuters) - Brazil's central bank slashed interest rates on Wednesday by 1.5 percentage points, the largest rate cut in more than five years, in a bid to prevent Latin America's largest economy from slipping into recession.
The bank's monetary policy committee, known as the Copom, voted unanimously to slash the so-called Selic rate to 11.25 percent from 12.75 percent. It was the second time this year the bank slashed borrowing costs.
"The committee will follow the evolution of the future trajectory of inflation until its next meeting, taking into account the speed of the adjustment of the benchmark interest rate and its cumulative effects, to then decide the next steps in its monetary policy strategy," the Copom said in a short statement.
The rate cut extended an easing cycle that started in January, when the Copom lowered the Selic by 100 basis points. The last time the Selic stood at 11.25 percent was between September 2007 and April 2008.
The rate cut came one day after Brazil reported its economy shrank 3.6 percent in the fourth quarter of last year, the largest quarter-on-quarter contraction since 1996.
Economists say the grim economic data, coupled with recent indicators showing inflation under control, mean the central bank has plenty of room to keep slashing rates in the coming months to boost the economy.
Armando Monteiro Neto, president of the National Industry Confederation, said the reduction did not go far enough.
"It's urgent that (the central bank) adopts a more aggressive stance, with rate reductions compatible with the necessities of the moment," he said. "It is necessary to bring the Selic rate to one-digit levels."
Octavio de Barros, chief economist of Bradesco, predicted the Selic rate would fall as far as 9.25 percent by the end of the year.
The rate reduction inspired various Brazilian banks, such as Unibanco (UBBR11.SA) ,Bradesco (BBDC4.SA), Itau (ITAU4.SA) and Banco do Brasil (BBAS3.SA) to reduce the rates they charge on their personal and corporate loans.
Sixteen of 20 economists surveyed by Reuters on Tuesday had predicted that the central bank would cut rates by 150 basis points.
On Tuesday, President Luiz Inacio Lula da Silva vowed that Brazil would be one of just a handful of economies in the world to grow in 2009. But some economists now say the South American giant could finish the year with zero growth, and on Wednesday a World Bank official said Peru is the only country in Latin America likely to escape a recession in 2009. (Editing by Leslie Adler)