Brazil cuts Selic rate to 11.25 pct as prices rise

Sep 5, 2007 - Brazil's central bank lowered its benchmark lending rate on Wednesday to 11.25 percent from 11.5 percent, the smallest cut since April as inflation accelerates and the economy gains steam.

The bank's monetary policy committee, known as Copom, voted unanimously to reduce the so-called Selic rate, trimming the size of rate cuts after two consecutive reductions of 50 basis points.

"The Copom examined the macroeconomic scenario and decided that at this moment, the risks for future inflation still warranted additional monetary stimulus," the bank said in a statement explaining its decision.

"The committee will closely monitor the development of the macroeconomic scenario until its next meeting to then define the next steps in its monetary policy strategy."

Policymakers next meet to decide on rates on Oct. 16-17.

The cut was expected by all 20 economists in a Reuters poll.

The bank has slashed the Selic by 8.5 percentage points since September 2005, cutting lending rates 18 consecutive times in Brazil's longest-ever monetary easing cycle.

Consumer prices have risen every month since April on an annual basis as prices for food items surge.

CAREFUL STEPS

The IPCA inflation index, which the central bank uses to set interest rates, rose 3.95 percent in the 12-month period through mid-August, the highest annual rate since a 3.97 percent gain in July 2006. The index rose 3 percent in April, then quickened to 3.18 percent in May, 3.69 percent in June and 3.74 percent in July.

Brazil's inflation is running below the central bank's target of 4.5 percent. Still, some economists have argued policy makers needed to trim the size of rate cuts as economic growth accelerates to keep inflation at bay.

"The Copom did what was expected given the faster economic activity, the increase in inflation and as the international scenario is now more uncertain," said Alexandre Mathias, chief economist at Unibanco Asset in Sao Paulo. "It will have to evaluate its next steps very carefully."

The interest rate decisions have shown a clear division among policy makers, with a 4-3 split vote in April, 5-2 in June and 4-3 in July. The unanimous vote on Wednesday signaled the bank may soon stop cutting rates altogether, said Octavio de Barros, director of economic research at Bradesco.

"After a long period of dissension, the unanimous vote confirms the central bank is united," Barros said. "This was most likely the last cut in the Selic this year... but I don't rule out one more cut."

The bank had already said in the minutes of its July meeting that faster growth would require it to be especially cautious about future cuts. Since the last meeting, indicators showed faster growth and a surge in consumer prices.

Of the 13 economists in the Reuters poll that gave forecasts for Brazil's interest rates for the rest of the year, nine expect the bank will trim the Selic by a quarter percentage point again in October, while four expect policy makers will keep rates unchanged.