Brazilian central bank statement on interest rates

Brazil’s central bank on Wednesday unexpectedly cut its benchmark interest rate BRCBMP=ECI to 12 percent from 12.5 percent without bias for future rate decisions.

Following is the text of the statement issued by the central bank’s monetary policy committee:

“The monetary policy committee decided to reduce the Selic rate to 12.00 percent per year, without bias, with five votes in favor of the cut and two votes to keep the Selic rate at 12.50 percent. Reevaluating the international scenario, the committee considers that there has been substantial deterioration, shown by, for example, generalized and large reductions in growth projections for the principal economic blocks. The committee understands that this increases the chances that restrictions that are today seen in various mature economies will prolong themselves for a longer period than expected. The committee also notes that in these economies, there appears to be limited space for the utilization of monetary policy and that a restricted fiscal scenario prevails. Therefore, the committee understands that the international scenario shows a bias toward disinflation on the relevant horizon.

“For the committee, the transmission of foreign developments to the Brazilian economy could materialize through various channels, among them the reduction of trade, moderation of investment flows, more restrictive credit conditions and worsening consumer and business sentiment. The committee understands that the complexity surrounding the international environment will contribute to the intensification and acceleration of the current process of moderation of domestic activity, which has already manifested itself, for example, in the reduction of growth forecasts for the Brazilian economy. Therefore, on the relevant horizon, the balance of risks for inflation becomes more favorable. Furthermore, the revision of the outlook for fiscal policy also points in that direction.

In this context, the committee understands that by mitigating at this moment the effects coming from a more restrictive global environment, a moderate adjustment of the basic rate is consistent with a scenario of convergence of inflation to the target in 2012.

The committee will attentively monitor the evolution of the macroeconomic environment and developments on the international scene to define the next moves in its monetary policy strategy.