Brazil cuts interest rates and taxes to head off hard landing for its economy

12/01/2011 4:40 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The same day, November 30, that the People’s Bank of China reduced the amount of cash that big banks have to keep on reserve to 21% from a record 21.5%, the Banco Central do Brasil cut actual interest rates for a third straight meeting. Today, December 1, the Brazilian government suspended a tax on foreign investment, and cut taxes on appliances, food staples, and consumer credit.

The goal of all this is to reverse a drop in Brazil’s growth rate that has started to worry the central bank and Brazil’s government—especially because the slowdown in European economies is expected to accelerate in 2012 with a good chance that the EuroZone will slip into recession. Brazil’s economy is forecast to grow at just a 3.1% rate in 2011. That’s quite a drop from the 7.5% growth of 2010.

Brazil’s central bank had raised interest rates to 12.5% in an effort to slow growth and reduce inflation to the bank’s target range of 4% plus or minus two percentage points. But now, even though inflation is still not under control (the annual rate of inflation was 6.69% in October), the bank has decided that the danger of Brazil’s economy stalling is great enough to reverse policy and begin cutting interest rates.

Yesterday’s move brings the benchmark Selic rate to 11%. In its post-meeting statement the bank signaled that this wouldn’t be the last cut either. The futures market is now pricing in a benchmark interest rate of 9.25% by July.

The Banco Central do Brasil didn’t give a growth target when it cut interest rates yesterday but the government did when it cut taxes today. The goal is to produce 5% growth in 2012 even with the slowdown in the global economy.

Like China, Brazil has decided to move to lower the odds of a hard landing for its economy.

 

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