Brazil cut its benchmark interest rate to a record-low 8 percent on Wednesday as policymakers scramble to revive an economy that has failed for nearly a year to respond to a barrage of stimulus measures. The central bank's monetary policy board, known as Copom, unanimously decided to lower the so-called Selic rate by half a percentage point, as expected. It was the eighth consecutive cut since last August, when the Selic stood at 12.5 percent. A slower-than-forecast recovery in the world's No 6 economy and a moderate pace of inflation have bolstered the case for the continuation of Brazil's aggressive rate-cutting cycle. The crisis in Europe, and the slowdown in the world economy, have also eased any concerns another reduction would be excessive, analysts say. On Wednesday, government data showed that retail sales plunged in May, undermining hopes for a sector that Brazil's government had long hoped would keep the economy alive. Due to the massive consumer market in Latin America's biggest country, policymakers during the slowdown have bet that rate cuts, tax breaks and other consumer stimulus would propel growth even as industrial production and investment by businesses wane. "At this moment, Copom believes that the risks to the inflation outlook remain limited," the bank said in its decision statement, which was identical to the one after its last rate-setting in May, when it also cut by 50 basis points. The language used in the statement left the door open for more rate cuts, analysts said. The current cycle resembles a previous series of rate cuts at the onset of the global financial crisis, when the Copom lopped 5 percentage points off the Selic between September 2008 and July 2009, cutting it to 8.75 percent. All 42 forecasts obtained in a survey by Reuters last week expected a 50-basis-point rate cut on Wednesday. Most economists in that survey saw the central bank lowering rates by another half a percentage point next month. But disappointing data, such as the retail slowdown, could extend the bank's rate-cutting run even further. "The central bank could go beyond 7.5 percent if the external outlook doesn't show signs of improvement and the local economy remains stagnant," said Newton Rosa, chief economist with SulAmerica Investimentos. The aggressive rate-cutting cycle and avalanche of government stimulus measures, from tax cuts to subsidized lending, have so far failed to pull the Brazilian economy out of its lull. The stagnation in Brazil comes as growth in much of the rest of the world also slows. The International Monetary Fund sees growth in the global economy slowing to 3.5 percent this year from 3.9 percent in 2011, and has warned that the outlook remains worrisome as Europe's debt crisis lingers. TOUGH TASK President Dilma Rousseff, a trained economist who gets involved in the various ministries that carry out economic policy, has made reviving Brazil's recent boom the focus of her administration. She has called for lower interest rates to stimulate consumption. Brazil continues to have the highest lending rates of the BRICS group, with the exception of India. The group also includes China, Russia and South Africa. When Brazil's growth first began to flag in mid-2011, Rousseff publicly prodded the central bank, which enjoys de facto autonomy, to begin lowering rates. Central bank President Alexandre Tombini complied. Those rate cuts have come alongside a succession of stimulus measures to help an ailing industry. Still, Finance Minister Guido Mantega has repeatedly cut official growth estimates for 2012 -- from an initial forecast of 4.5 percent at the beginning of the year to a current projection of about 2.5 percent. Growth at that level would be below last year's 2.7 percent, but above the 2 percent that most private economists expect. Squeezed by a strong national currency, Brazilian manufacturers have grown uncompetitive against foreign rivals and are considered one of the main drags on the economy. Although Brazilian consumers continue to spend - albeit more cautiously than in years past - industrial output remains weak. Some car manufacturers, a marquee industry in Latin America's biggest country, are already offering workers voluntary buyouts. Brazilian businesses also suffer from rising costs because of high taxes, expensive credit, a shortage of skilled labor and infrastructure bottlenecks. Together, the problems amount to what has long been known as the "Brazil cost" - the structural expenses that make business in the country expensive compared with many other emerging markets. SEEKING LEGACY OF LOW RATES To reduce that cost, Rousseff is pushing for lower rates and cheaper credit for businesses and consumers. Aides say she wants those two achievements to be the main legacy of her government. In an effort to allow rates to keep falling, Rousseff has sought to keep inflation at bay by keeping a lid on government spending. That has angered legislators, unions and businesses pressing for more fiscal stimulus, but helped moderate price increases. A lower Selic also helps her government save more. For every percentage point that the central bank cuts off the Selic rate, the country saves about 11 billion reais ($5.42 billion) in total debt interest payments a year, according to calculations by SulAmerica Investimentos' Rosa. The 50-basis-point cut reduces the federal government interest payments on its debt by nearly 3 billion reais in a 12-month period, according to Reuters calculations based on central bank data. That figure does not include debt from the central bank, state-run companies and state and municipal governments. About 25 percent of the federal government's debt is linked to the Selic rate. Annual inflation declined to a nearly two-year low of 4.92 percent in June. The easing was partly the result of government tax breaks on cars and other industrial products. Analysts increasingly agree that inflation could end the year just slightly above the midpoint of the official target of 4.5 percent plus or minus 2 percentage points. But some economists worry that prices could rise with a vengeance next year. The ongoing stimulus will have taken effect by then, they believe, causing the economy to pick up speed. Reuters
