Brazil Central Bank Unexpectedly Cuts Its Overnight Rate To 12.0% From 12.5% Following Observations Of "Substantial Economic Deterioration"

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In a shocking move, one which is sure to reverberate around the Developing and certainly Developed World, the Brazilian Central Bank just announced that it was cutting its Selic (overnight lending) rate from 12.5% to 12.0%, citing "substantial economic deterioration" - something that not one of the 62 analysts covering Brazil had anticipated. It seems that following over a year of small arms fire FX intervention sniping, Brazil has finally reevaluated its growth prospects, and instead of dealing with the inflow of capital on a piecemeal basis by buying dollars daily - a move which has not worked at all, has decided to cut off flows at the stem. This is most likely the first of many rate cuts by Brazil which is obviously anticipating a major growth contraction in China, and as a result we expect the the other BRICs will very soon reevaluate their stance vis-a-vis being the remaining target of global capital flows. Ironically, up until now it was mostly the developed (read bankrupt) world that was devaluing its currencies... Well, make way for the new kids on the block because this is about to get interesting.

Full translated statement from the BCB

Brasilia - The Committee decided to reduce the Selic rate to 12.00% pa, without bias, by five votes to two votes for the maintenance of the Selic rate at 12.50% pa Rethinking the international scene, the Committee considers that there has been substantial deterioration, reflected, for example, generalized reductions in the magnitude and growth projections for major economic blocs. The Committee believes that increased the chances that the restrictions which are now exposed several mature economies extending over a longer period of time than anticipated. Note that, in these economies, it seems limited scope for using monetary policy and a scenario prevails fiscal restraint. Thus, the Committee considers that the international disinflationary bias manifests relevant horizon. 

 

For the Minutes, the transmission of external developments in the Brazilian economy can be realized through various channels, among others, reducing the flow of trade, moderating the flow of investment, tighter credit conditions and worsening in consumer and business sentiment . The Committee understands that the complexity surrounding the international environment will help to intensify and accelerate the ongoing process of moderation in domestic activity, which is already manifest, for example, the retreat of the growth projections for the Brazilian economy. Thus, the relevant horizon, the balance of risks to inflation becomes more favorable. Incidentally, this also points toward a revision of the scenario for fiscal policy. 

 

In this context, the Committee believes that, to promptly mitigate the effects from a global environment more restrictive, a moderate adjustment in the level of base rate is consistent with the scenario of convergence of inflation to the target in 2012. 

 

The Committee will monitor carefully the evolution of the macroeconomic environment and developments in the international scenario and then define the next steps in its monetary policy strategy. 

 

Brasilia, August 31, 2011

And for google translate non-believers, here is the same thing translated by Reuters:

"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.