The news March 7 that Brazil's central bank had reduced its benchmark interest rate by 75 basis points, to 9.75 percent, took the market by surprise.
The cut wasn't unexpected. The bank has been trimming Brazil's Selic interest rate, one of the world's highest, since August. But the reduction was larger than expected, and the decision wasn't unanimous: Five members voted for it, two against.
The bank's move was also complicated by recent news that Brazil's economy had grown a disappointing 2.7 percent in 2011 -- less than the government had hoped for and significantly less than 2010's figure of 7.5 percent. Industrial production, too, was down 2.1 percent in January compared with the previous month.
In the week since the announcement, Brazil's noisy Internet has been roiled with debate over the economy -- and second-guessing of the bank's decision.
Paulo Pereira da Silva, president of the workers' union Forca Sindical, argued on the union's website that the rate cut wasn’t enough:
The fall in the Selic rate is timid and insufficient to heat up consumption, create jobs and improve GDP. A little more daring would bring enormous benefits to the production sector, which generates jobs and income and which has been longing for significant growth of the economy ... The working class is tired of this sequence of errors of government sectors ... We are suffering from deindustrialization and the rampant growth of imports, which are undermining our production, closing businesses and causing unemployment.
On the other side, Gustavo Loyola, a former central bank president, told the Estado de Sao Paulo newspaper that he thought the cut could have been too "accelerated" and warned of potential inflation:
The central bank unfortunately didn’t leave many clues to its motivation. If it was just a negative reaction to the 2011 GDP and January’s industrial production, I think the central bank has really been rash ... the perhaps unnecessary movement could cause a headache for the central bank if inflation accelerates at the end of the year.
Beyond the immediate interest-rate decision, plenty of blame was being spread around about Brazil's worsening economic picture.
Brazilian President Dilma Rousseff on March 1 had launched an attack on developed countries for creating a "currency war based on an expansionary monetary policy," reported Globo’s G1 news website. In her speech, given at a ceremony in Brasilia to mark the signing of a new agreement for workers' rights, Rousseff launched a buzzworthy new economic phrase to describe developed countries' efforts to "artificially devalue" their currencies:
That is why we are worried, yes, with this monetary tsunami done by developed countries, which don’t use fiscal policies that expand investment capacity to take control and exit the crisis they are stuck in -- and they therefore dump, literally dump, $4.7 trillion on the world.
The phrase "monetary tsunami" took flight the next few weeks, repeated by politicians such as Finance Minister Guido Mantega to explain the dangers of a strengthening real.
Jim O'Neill, chairman of Goldman Sachs Asset Management and the Brazil expert who coined the term "BRICs," told Bloomberg News March 12 that the real needed to lose 20 percent of its value to become sustainable. "Brazil’s biggest cyclical challenge is to get rid of the strength of the real," he said. O'Neill added that he supported the central bank's decision to reduce the Selic.
Luiz Lemos Leite, the president of the financial association Anfac and a former central-bank director, argued in the Gente de Opiniao March 8 that improving Brazil's economy would take more than changes in monetary policy. What was needed was reform of the country’s "anachronistic" tax regime, whose "high costs to society" inhibited competitiveness. He said:
Brazil is demanding a courageous and efficient simplification of the tax and fiscal systems, a historic opportunity that President Dilma, with her high prestige, should not waste to meet the needs of all segments.
In an editorial March 12, the business daily Valor agreed, and expressed sympathy with the government's "torments" about the overvaluation of the real and the peaks and troughs of the economy. Brazil needs to resolve a long list of "structural" questions, the editorial said -- such as excessive taxes, a low savings rate, lack of investment, a scarcity of long-term financing instruments, deficiencies in education and a dearth of skilled labor.
"The measures that are being adopted," Valor said, "don't give structural responses to these questions."
In this volatile scenario, with Brazil determined to protect itself from what it sees as outside monetary threats, many are predicting that more interest-rate cuts are likely. The central bank's Monetary Policy Committee meets again in April. And whether it decides to keep cutting or not, the bank is unlikely to come out of the firing line anytime soon.
Nothing quite animates the Brazilian media like the country’s own economic performance.
(Dom Phillips is the Rio de Janeiro correspondent for World View. The opinions expressed are his own.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Dominic Phillips at DOMINIC.PHILLIPS@BNPPARIBAS.COM
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