Brazil Cuts Rates to Record Low as Economy Stalls

Another central bank may have it backwards as lower rates turn out to be deflationary and slow things down via interest income channels?

Brazil Cuts Rates to Record Low as Economy Stalls

May 30 (Bloomberg) — Brazil’s central bank cut interest rates on Wednesday for the seventh straight time to a record low 8.50 percent, moving into uncharted territory in a bid to shield a fragile recovery from a gloomy global outlook.

President Dilma Rousseff has made lower interest rates one of the top priorities of her government which is struggling to steer the economy back to the 4 percent-plus growth rates that made Brazil one of the world’s most attractive emerging markets in the last decade.

The central bank’s monetary policy committee, known as Copom, voted unanimously to lower the benchmark Selic rate 50 basis points from 9 percent, in line with market expectations.

“At this moment, Copom believes that the risks to the inflation outlook remain limited,” the bank said in a statement that accompanied the decision. The statement used the exact same language as the previous statement when the bank cut the Selic rate in April.

With Wednesday’s cut, the central bank has now lopped 400 basis points off the Selic rate since August 2011, when it surprised markets by starting an easing cycle despite widespread concerns at the time about surging consumer prices.

Inflation has eased since then with some help from a sluggish global economy, bringing the annual rate to well below the 6.5 percent ceiling of the central bank’s target range.

That has allowed the central bank to test the boundaries on interest rates, ushering in what some economists predict might be a new era of lower borrowing costs for Brazil.

The size of Wednesday’s rate cut marked a slowdown in the pace of easing after two straight reductions of 75 basis points in March and April. The central bank signaled after its April policy meeting that future rate cuts might be more cautious.

The previous low for the Selic was set in 2009, when the central bank in the administration of former President Luiz Inacio Lula da Silva slashed the rate to 8.75 percent to fend off the global financial crisis.

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139 Responses to Brazil Cuts Rates to Record Low as Economy Stalls

  1. DOB says:

    “as you said before, your ‘carry traders’ will only be profitable if they can force my guys into a net export posture.” ->

    Actually my carry traders will force you into a net export posture regardless of whether they end up being profitable or not.. Much like Chinese authorities unprofitably forces the U.S. into a net export position. Of course, if the carry traders end up being unprofitable, they’ll eventually stop..

    “and I have a sharp eye on optimizing our real terms of trade, so good luck to them.” ->

    I don’t doubt that, but your sharp eye is increasingly looking like a central planning authority which aims to plug all the holes caused by bad policy in the first place.

    The carry traders are just a manifestation of the problem. If a citizen of your country is sitting there with capital and wants to pack up and leave (with his capital), are you going to let him? Are you going to confiscate (tax) some portion of his capital when he crosses the border? If so, I have a problem with this from a personal freedom standpoint..

    “$1 of increase in the value of your home isn’t necessarily the same as $1 increase in nominal income.” ->

    Other than the fact that increases in income tend to be ‘perpetual’ and that increase in home value will require a sale/refinance to be turned into cash, I don’t see the difference..

    Reply

    Save America Reply:

    @DOB,

    You will bow down and SERVE slave! Or meet the full force of this fully functional death star predator DRONE! Do not underestimate the POWER of the darkside! ;)

    http://www.zerohedge.com/news/europe-brings-out-capital-controls-bazooka

    •EU SOURCES HAVE DISCUSSED IMPOSING CAPITAL CONTROLS AS WORST CASE SCENARIO IF GREECE LEAVES EUROZONE – RTRS
    •IMPOSING BORDER CHECKS, LIMITING ATM WITHDRAWALS ALSO PART OF WORST-CASE SCENARIO PLANNING – EU SOURCES – RTRS
    •SUSPENSION OF SCHENGEN ALSO DISCUSSED

    http://www.zerohedge.com/article/its-official-america-now-enforces-capital-controls

    It couldn’t have happened to a nicer country. On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487), brilliantly goalseeked by the administration’s millionaire cronies to abbreviate as HIRE. As it was merely the latest in an endless stream of acts destined to expand the government payroll to infinity, nobody cared about it, or actually read it. Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions – Subtitle A—Foreign Account Tax Compliance, institutes just that. In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS. And should this provision be deemed illegal by a given foreign nation’s domestic laws (think Switzerland), well the foreign financial institution is required to close the account. It’s the law. If you thought you could move your capital to the non-sequestration safety of non-US financial institutions, sorry you lose – the law now says so. Capital Controls are now here and are now fully enforced by the law.

    Reply

    DOB Reply:

    @Save America,

    Scary :-/

    Reply

    Save America Reply:

    @DOB, In 1962, along with Marcus Fleming, he co-authored the Mundell–Fleming model of exchange rates, and noted that it was impossible to have domestic autonomy, price stability, and free capital flows: no more than two of those objectives could be met. The model is, in effect, an extension of the IS/LM model applied to currency rates.

    WARREN MOSLER Reply:

    he failed to recognize the currency is a simple public monopoly so he was mistaken

    MamMoTh Reply:

    @DOB,

    I’d say he recognized that with free capital flows the government has no monopoly on the currency in which the private sector saves.

    Save America Reply:

    @DOB, DOB, I want to use Warren Mosler himself as a good example of the REAL TRAJEDY that he has allowed the state to make such a SLAVE of himself and his family.

    The world is a very large and dynamic place, car races are happening all over (warren likes those), sail boat races (warren has a superyacht), I watch this tv show river monsters where this guy goes all over the world to fish (warren likes to fish), there are financial conferences and meetings all over (warren just went to italy), and rick steves says that travel is the enemy of narrow mindedness and such.

    But here is our esteemed host, Warren Mosler, renaissance man, lila thinker, LOCKED DOWN to 1 piece of land, a tiny island, for 6 months out of the year, (he must stay on his USVI island to get those tax breaks), I was just down there in the USVI a few months ago, I asked everyone, if you were rich, would you stay in the USVI for 6 months a year, the all said NO! If they were rich, they would get out of that hurricane death trap.

    I am not as rich as warren, but I love to travel, and I like to see car races all over, and go to conferences all over, and fish all over, and how a man of his wealth can be happy locking himself and his family 6 months a year into a hurricane death trap piece of land shows what a REAL SLAVE he really is :( Now he tells me his car company only has 3 employees, but I thought some USVI refinery just closed down and there are lots of people without work that he could probably hire with government subsidies for his company or another alternative energy company, etc etc

    I imagine if I had my own car company like he does, with races all over the place, I would want to be there in person and watch my baby. I wouldn’t want to be locked down to 1 small piece of land 6 months out of every year. Look at the things warren CAN’T do because he has to stay a slave to those capital rules he wants to follow for those 3% tax rates, what a shackle!

    Reply

    WARREN MOSLER Reply:

    Actually I’d like to be here 365 days a year.
    And it’s been years since I made enough for the tax breaks to help any.
    :(

    Reply

    DOB Reply:

    @Save America,

    LOL :-D

    A very entertaining post!

    Reply

    WARREN MOSLER Reply:

    that’s one place we do not agree,
    i don’t think you can force my guys into net exports, given all the tools I have at hand.
    And I do see your point that your guys could borrow my currency and buy things from us if they wanted to,
    but I can limit real exports in a variety of ways, and I can buy things from you, etc.

    Govt is necessarily a central planning vehicle for public purpose such as the legal system, military, etc.
    And as a by product of that activity my govt will not burden with residual unemployment created by the tax liabilities,
    or adversely disrupt the pursuit of optimal real terms of trade.

    My citizens can, in this context, buy anything they want with their local currency.

    Not sure what you mean by taking his capital and leaving- shipping drill presses to other nations?

    The difference in incomes is one is an addition to your financial assets and the other isn’t.

    Reply

    DOB Reply:

    @WARREN MOSLER,

    “but I can limit real exports in a variety of ways, and I can buy things from you, etc.” ->

    I think those ways are either forms of capital controls, or you can run the opposite (negative) carry trade on your government’s balance sheet. This involves your government shorting a currency it cannot print in potentially very large size..

    “[..] with residual unemployment created by the tax liabilities,” ->

    Unemployment is a direct consequence of price rigidities under deflationary pressures. I believe that’s in your book? So I’m not sure why a slew of fiscal operations which all have distortionary effects which you heroically attempt to get exactly right such that they all cancel down to just pushing off my carry traders would do a better job at affecting the price level than setting interest rates which is perfectly targeted to affect nothing but the value of money and fend off deflationary pressures..

    “My citizens can, in this context, buy anything they want with their local currency.” ->

    Yes, but less of it, because you have to tax them to support your currency (that’s assuming you don’t have capital controls on, of course with capital controls all bets are off but I’m rejecting those on ethical grounds).

    “Not sure what you mean by taking his capital and leaving- shipping drill presses to other nations?” ->

    Yes (though I’ll admit I’m not sure what that is). Or oil. Or steel. Or computers.. For sure it’s going to be hard to uproot a factory from the ground and ship it but it’s not just about the guys that will want to leave, it’s also about the guys that might have come but won’t. The factories that could have been built but won’t be.

    “The difference in incomes is one is an addition to your financial assets and the other isn’t.” ->

    Can be turned into addition to financial asset with refi/sale if your mortgage isn’t underwater but I think we’re splitting hair here.. If my salary was paid to me by my employer settled in Gold, would my behavior be any different than if I got dollars? I’d just sell the Gold to get dollars..

    Reply

    Save America Reply:

    @DOB,
    “For sure it’s going to be hard to uproot a factory from the ground and ship it”

    You must be joking! LOL! Imports are a benefit, exports a cost ;) Here is a picture showing us exporting entire cities, hell we exported the whole state of michigan according to this photo!

    http://www.thedeathofamerica.org/images/shanghai-detroit.jpg

    Save America Reply:

    @DOB, PS, notice 1990 shanghai with nice clear blue skies, but now all dirty and killing the asian childrens lungs with cancer, but modern day detroit has lots of green grass and wide open parks and few polluting factories, maybe Larry Summers and the crats have it right with carbon cap and trade, export the pollution to the third world while the western world sits down and enjoys our fresh air and long lives.

    WARREN MOSLER Reply:

    I can buy your goods and services by selling my currency for yours in the market place and then buying your goods and services with your currency.
    there is no short position on my end, and if it’s offsetting your attempt to somehow force me to export to you it seems like it’s ‘aggregate demand neutral’ though I still don’t see how my guys can be forced to export to you because your interest rates are higher. And if that were the case, it would follow that cutting rates would increase exports, probably via a weakening currency? So it’s back to you believing that my lower rates mean my currency is weaker? Again, that’s the mainstream view and what’s driving policy in most nations, but I don’t see it that way in theory or practice.

    Unemployment is a direct result of taxation, as per my book. And govt. spending subsequently hires those who the tax caused to be unemployed.

    What I meant was my citizens were not legally prevented from buying anything they want with their funds.

    Yes, can be turned into financial assets at ‘market prices’, but that doesn’t mean they don’t differ.
    The difference matters because desires to save financial assets cause spending to sag, as the currency is a case of ‘inside money’ and in that sense a ‘closed’ system. And the evidence of unrealized savings desires is unemployment, again as per my book.

    Yes, you could sell the gold to get dollars, but then that guy doesn’t have dollars. net financial assets of a sector can’t be altered by transactions within the sector.

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