By Fabio Alves, Bloomberg Columnist Brazil's central bank cut the benchmark lending rate by a fur...
By Fabio Alves, Bloomberg Columnist
Brazil's central bank cut the benchmark lending rate by a further 0.5% after 10 straight reductions failed to stimulate economic growth.
Policymakers reduced the overnight interbank rate to 13.75%, as predicted by 23 of 25 economists surveyed by Bloomberg. Central bankers have slashed the benchmark rate 6% since September 2005.
"Growth isn't really going anywhere and inflation expectations are well below the targets, so there is no reason for the central bank not to lower interest rates more aggressively,'' said James Barrineau, who helps manage $9bn in emerging market debt at Alliance Bernstein.
"The previous 10 rate cuts did not stimulate economic activity as much as policymakers had hoped.''
Latin America's largest economy expanded 1.2% in the second quarter, the smallest gain in three quarters, after a 3.3% growth in the first quarter and a 2.3% expansion in 2005.
The Brazilian economy probably will grow 3% this year, according to the median estimate of about 100 economists in the central bank's weekly survey published on 16 October.
A currency rally ate into export revenue and prompted manufacturers such as Volkswagen AG's Brazilian unit to scale back output and pare staff.
The Brazilian real has surged 66%, the best performance among the 16-most traded currencies tracked by Bloomberg since President Luiz Inacio Lula da Silva took office in 2003.
A stronger currency also made imported goods cheaper and helped dampen consumer prices increases.
Meanwhile, Brazil's annual inflation, as measured by the government's price index the Inflation Index by the Institute (IPCA), slowed to 3.7% in September, the lowest since June 1999, from 3.8% in August.
Economists forecast consumer prices will rise 3% this year and 4.2% next year, the central bank's weekly survey showed.
That is below the 4.5% inflation target for 2006, 2007 and 2008 set by the central bank.
As economic activity expands at a more moderate pace than previously expected, the outlook for inflation becomes more favourable for next year,
Flavia Cattan-Naslausky, a currency strategist at RBS Greenwich Capital Markets, said: "Inflation probably will continue generating positive surprises for central bankers and give them leeway to further cut rates this year and next.''
She expected a further 0.5% rate reduction at the central bank's November policy meeting, bringing it down to 13.25% by year end.
Interest rates reductions by Brazil's central bank have yet to boost demand from clients of Linde AG's South American unit, a producer and supplier of industrial gas.
"Interest rates in Brazil are still too high,'' the unit's chief executive officer Clemis Miki said. "They would have to drop to a more competitive level globally in order to spur production.''
Brazil's industrial output rose 3.2% in August from a year earlier, less than the 3.5% increase in July, a government report showed on 5 October.
Auto production fell 5.6% to 203,043 units in September from a year earlier, according to the country's automakers association, known as Anfavea.
Brazil's new vehicle registrations rose 10% last month from a year earlier, falling 11% from August, Anfavea said in a report on 5 October.
"Previous reductions in interest rates have had little effect on the production of machinery and equipment because those cuts were offset by a stronger currency,'' said Newton de Mello, president of Brazilian Machinery Builders' Association, known as Abimaq,.
He estimated sales of machinery fell 4% this year through August from the same period in 2005.
Brazilian economists expect the currency to end the year at 2.18 per dollar, compared with a previous forecast of 2.19 per dollar, the central bank's weekly survey showed. They also predicted policymakers will lower the benchmark overnight rate to 13.50% by year end and to 12.50% at the end of 2007.
'Economic growth should quicken next year as interest rates fall further,'' said Paulo Tenani, strategist at UBS's Brazil wealth management unit.
He forecasted policymakers will lower the benchmark overnight rate to as low as 10% by the end of 2007.
Tenani also predicted the Brazilian economy will expand as much as 4% next year.
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From 1 March