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Economy & Business - November 2003
BRAZIL: Central bank cuts as economy fails to bounce
Central bank surprises with bigger cut
Arguably, the central bank's reading of the economy is more in line with the SRE than the optimists in the government and the financial markets. This would explain why it surprised all but one of the country's leading independent economists and cut interest rates by 1.5 percentage points at its latest monetary policy committee (or Copom) meeting on 19 November.
The cut was 50% larger than 38 of the 43 economists polled by the Agência Estado had forecast. Four of the economists polled forecast cuts of less than one percentage point. Only one of the economists polled, Nuno Camara, the chief economist for Dresdner Kleinwort Wasserstein, broke with the consensus and correctly forecast a 1.5 point cut in rates. The cut brought the key Selic rate down to 17.5% a year.
Camara argued that the 1.5% cut was justified because of the fall in inflation. He pointed out that if rates had been cut by just one percentage point, the real interest rate would actually have ended up higher than it was in October. Following the cut in rates, real interest rates are now around 10%.
Camara takes a more bullish view on inflation than most other economists do. On the bald Selic rate minus the inflation consensus for the next 12 months (which is 5.93%), the real interest rate would appear to be closer to 11.5%. Other economists calculate real interest rates by using calendar-year inflation and subtracting this from the Selic rate. The most bullish figure for the real interest rate is reached by using the actual inflation rate for the past 12 months and subtracting this from the actual Selic rate. This method gives Brazil a real interest rate of just 8.7%, putting it well below Turkey (14.9%) and Israel (9%).
Another way to calculate the real interest rate is to take the rate indicated by the futures market for the next year (16.38%) and to subtract inflation for the next year from it.
The cut in November was the sixth consecutive time the Copom has lowered rates. Since July, when rates stood at 26.5%, the Copom has cut rates by nine percentage points. There is one more Copom meeting scheduled for this year.
