Lula Says Brazil Has Room for More Interest-Rate Cuts

Brazilian President Luiz Inacio Lula da Silva said the central bank has room to make further cuts in its overnight lending rate.

“We have the lowest level of interest rates in our history,” Lula said at a conference yesterday in Brasilia. “It’s desirable and possible to cut further.”

The central bank made the smallest rate cut in five meetings last month on signs that Latin America’s biggest economy has begun pulling out of a recession. Minutes of the meeting showed policy makers said at the time that the 8.75 percent lending rate, slashed from 13.75 percent in December, would spur economic growth without sparking inflation.

Lula also has tried to revive economic growth by injecting about $100 billion into money and currency markets and by cutting taxes on cars, household appliances and other goods to encourage consumer spending. After slipping into recession in the first quarter of the year, Brazil’s gross domestic product may be rebounding, powered by personal and government spending.

Annual inflation slowed to 4.5 percent last month, the lowest rate since December 2007 and in line with policy makers’ annual target. Monthly inflation, as measured by the IPCA index, slowed for the third straight month in July.

Brazil’s “sluggish” economic recovery will allow the central bank to cut the benchmark interest rate in the first half of next year, BNP Paribas’s senior analyst Diego Donadio said in an Aug. 7 report.

Unchanged Rate

Brazil’s central bank monetary policy committee meets next on Sept. 1-2. Policy makers will keep the key interest rate unchanged for the rest of this year and raise it to 9.25 percent in 2010, according to a central bank survey of economists published Aug. 10.

Former Brazil central bank President Gustavo Franco said in an interview last week that slower inflation has given the central bank room to reduce borrowing costs. Government rules, including guaranteed minimum returns on savings accounts, discourage policy makers from cutting rates, he said.

“There are still elements of financial repression that need to be destroyed,” Franco said. “That’s what is preventing the central bank from being more aggressive.”

A large rate gap with developed countries is luring investors to Brazil’s fixed-income assets and putting pressure on the real, which has gained 26 percent this year, the most of any Latin American currency, Franco said.

The real gained for a second straight day, rising 0.9 percent to 1.8223 per U.S. dollar at 8:02 a.m. New York time, from 1.8388 yesterday.