Brazil to increase primary surplus and make room for cut in interest rates

Brazil plans to further contain government spending this year to prepare the country for a global slowdown and make room for a cut in interest rates, Finance Minister Guido Mantega said on Monday.

The government raised its target for the 2011 budget surplus before interest payments to 91 billion Real (57 billion dollars) from 81.7 billion Real, Mantega told reporters in Brasilia.

Brazil joins countries from Mexico to Turkey in signalling that rate cuts may be on the horizon as global growth sputters and a debt crisis in Europe worsens.

“It makes it viable in the medium- or long-term to cut interest rates,” Mantega said. “As you reduce or stop increasing public spending, you open space for a reduction in interest rates when the central bank thinks it is possible.”

The central bank’s board of directors, led by President Alexandre Tombini, begins its August policy meeting Tuesday, with inflation above 7% for the first time since 2005. Traders are wagering that policy makers will cut rates a quarter-point this week, and between 0.75 and 1 percentage point by year-end, as the economy shows signs of cooling and the global recovery falters.

Mantega said he sees no immediate need for monetary stimulus and added that inflation is a permanent concern for President Dilma Rousseff’s government.

Mexico policy makers kept the benchmark rate at a record low 4.5% for the 21st consecutive meeting on Aug. 26 and said they would consider adjusting it if the national or global economic outlook worsens. The Turkish central bank also left its benchmark rate unchanged on Aug. 23 and Governor Erdem Basci said the institution may have to loosen monetary policy. Peru and Chile also held rates this month.

 Brazil’s budget surplus (before interest payments) widened in July to a record for the month pushing the year-to-date total to almost 80% of the 2011 target.

The so-called primary surplus, which includes federal and local governments as well as state companies, last month rose to 13.8 billion Real from 13.4 billion Real in June. The government earlier this year cut 50.7 billion Real from its 2011 budget.

Brazil’s economic activity shrank in June for the first time since December, 2008. Industrial production fell 1.6% in June the second-biggest drop in output since 2008, and business confidence in the second quarter fell to its lowest level since 2009.

Brazil is the largest economy in Latin America.