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Archive for March, 2009

By John Fitzpatrick

Sky-high interest rates are as much a feature of Brazilian life as samba, football and television soap operas and the media constantly reminds us that they are the highest in the world. Well this particular soap opera may be coming to an end with the Central Bank decision on March 11 to slash the base rate by 1.5% to 11.25%. This sudden change would never have occurred had it not been for the international financial crisis. Of course, the rate is still meteoric by international standards and does not reflect the real rate charged by banks but the signs point to further cuts and some analysts are predicting interest rates of less than 10% by the second half of this year. While some economists and sectors have hailed the move, others have been critical and say it was still not enough to prevent Brazil entering a recession this year. To mark the prospect of single-digit rates, which I must confess I had almost never expected to see, Brazil Political and Business Comment and Gringoes.com present the views of a number of economists and business and political leaders.

“The risk still exists of the currency depreciation being passed on in prices which would lead the Central Bank to put its foot on the brake. We are facing a crisis of confidence in which the banks and consumers are becoming more conservative in granting credit regardless of the level of interest rates.”
Mailson da Nobrega, former finance minister and partner of Tendências Consultoria Integrada

“It is reasonable to expect a new cut but the Copom does not want to commit itself to any size. It will need to assess the effects of what it has been doing. What could affect the interruption of the downward trend would be higher inflation. Inflation is expected to come to between 0.34% and 0.35% this month but if it were to reach 0.5% this could be alarming although it is unlikely. At the same time, the Central Bank could show some concern over the recovery in industrial production although this is also unlikely. The rise of the dollar could also have an influence if it reaches R$2.60 in the short term. This would lead to a pass-on effect on prices but the chances of an increase happening now are very small.”
Alexandre Schwartsmann, former Central Bank director and chief economist of Banco Santander

“Interest rates of 11.25 p.a. are still extremely high. Brazil needs a Selic rate of 8% at the maximum. As long as it does not fall to this level we will remain on the wrong path. Industry will start performing much better on the day interest rates reach 7% to 8%. The Central Bank should be acting to achieve this.”
Paulo Skaf, chairman of the Federation of Industries of São Paulo State (FIESP)

“This fall will benefit the consumer who will have a greater volume of credit at lower interest rates as the financial institutions have already announced lower rates. Companies will also gain as they will have a greater supply of credit for investment. Even the government will gain as it will pay less interest on the public debt and have resources available for investment. If the rate falls to a single-digit level in the second half of the year this will be extremely promising for the consumer and the Brazilian credit market as it will boost growth and encourage individuals who are ready to buy and lend although at a lower level,”
Adalberto Savioli, chairman of the National Association of Credit, Financing and Investment Association.

“The next Copom decisions will depend on how the inflation and activity figures perform but these should not prevent new adjustments in the Selic rate. We do not believe the cycle of interest rates cuts will end with today’s announcement. It is extremely likely that the Selic rate will reach a single-digit level by the middle of this year and be maintained to the end of 2009. In principle, we expect the total adjustment will take the rate to 9.75% at the end of the process although we also consider that it may even slightly lower.”
Silvio Campos Neto, chief economist, Banco Schahin

“The Central Bank was braver than usual but its approach will not be enough to rescue the economy from sudden death. I have been critical of the Central Bank for its timidity in reducing the Selic rate in 2006 and 2007 but I can see that since the crisis exploded it has acted in an austere, serious way faced with the danger of the higher dollar being passed on in prices.”
Paulo Rabello de Castro, chairman, RC Consultores

“I think the cut in the Selic rate should have been greater but the fact that the decision was unanimous shows that the members of the Copom are now much closer to reality.”
Marcelo Ribeiro, strategist, Pentágono Asset Management

“This acceleration of the cut in interest rates is still not fast enough for the current moment. The Central Bank is still showing that it is not following the right course to prevent a recession.”
Armando Monteiro Neto, chairman of the National Confederation of Industry and member of the House of Representatives

“The unfeeling technocrats of the Copom have lost a great opportunity to loosen the rope strangling the productive sector which creates employment and income. Unfortunately, once again the government is leaning towards the speculators.”
Paulo Pereira da Silva, chairman of the Força Sindical labor union federation

“The Central Bank took an attitude which was compatible with the sharp downward movement in economic activity we have seen in recent months. At the same time, market expectations for inflation continue to decline and there is still a chance of gasoline prices being cut which would bring an added relief to the indices. A bigger cut of 2% would have come as a surprise and been better received by the market but it might have brought undesirable effects on the interest rate futures curve.”
Rubens Sardenberg, chief economist, the Brazilian Bankers Association

“In principle, we expect the Copom to cut the Selic rate by 150 basis points in April and make a further cut of 100 basis points in July which would take the level to 8.75%. However, we do not rule out the need for new cuts depending on how the external crisis develops and the Brazilian economy performs in the coming months.”
Maristella Ansanelli, chief economist, Banco Fibra

Note: these comments are edited translations from the economists themselves and the following newspapers: Estado de S. Paulo, Folha de S. Paulo, Valor Economico and Gazeta Mercantil.

John Fitzpatrick 2009

John Fitzpatrick is a Scottish writer and consultant with long experience of Brazil. He is based in São Paulo and runs his own company Celtic Comunicaçõess. This article originally appeared on his site http://www.brazilpoliticalcomment.com.br. He can be contacted at jf@celt.com.br.

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