Reuters: Financial Services and Real Estate: Slower economy justifies Brazil's rate cuts - Tombini

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Slower economy justifies Brazil's rate cuts - Tombini May 13th 2012, 20:43 Tweet Share this Email Print Sun May 13, 2012 4:43pm EDT * Central Bank chief reiterates independence from government * Says economy in warm-up phase, stronger in 2nd half of yr * Won't use macroprudential measures to avoid rate hikes RIO DE JANEIRO, May 13 (Reuters) - Brazil's interest rates are falling because economic conditions allow it to ease monetary policy and not because of any pressure from the government, Central Bank President Alexandre Tombini said in a newspaper interview published on Sunday. Tombini told O Estado de Sao Paulo that Brazil's economy, which almost slid into recession in late 2011, is entering a warm-up phase and should pick up steam in the second half of 2012, but a recently worsened outlook abroad will hurt exports. The central bank governor has been fending off accusations lately that he had yielded to pressure from the administration of President Dilma Rousseff to lower rates and speed growth when he embarked on an aggressive series of interest rate cuts. The bank has trimmed 350 basis points off its Selic benchmark rate since August and hinted it could cut rates to record lows as inflation eases and the economic recovery remains weak. The rate is currently at 9 percent, only 25 basis points above the record low. "The Selic is falling, leading to a significant reduction in the real interest rate, because of a specific combination of internal and external factors and not to please President Dilma," Tombini told O Estado de Sao Paulo. That dovish stance is at the heart of Rousseff's drive to revive an economy that is still struggling to recover.  Tombini told the paper the bank would not hesitate to raise rates again when necessary. But he said any future increases would occur in the context of lower real interest rates, or rates adjusted for inflation, which he said would stay lower. Brazil's government has pushed hard this year for banks to cut the cost of loans by trimming the margins they earn on them. The government said their spreads were among the world's highest and held back economic growth that it is now trying to rekindle. Banks, led by the state-controlled Banco do Brasil and Caixa Economica, have lowered margins in response but argue that their spreads were justified by the high costs they face as well as rising loan defaults. WARM-UP PHASE Tombini told the newspaper that the economy was now in a warming-up phase that would eventually reduce loan defaults. He described economic growth of 4 percent as satisfactory for the country, and said 2010's blistering 7.5 percent growth was more an anomaly than a reflection of Brazil's true potential. He said the economy would grow more in the second half of this year than in the first. Latin America's biggest economy grew only 2.7 percent last year as its manufacturers struggled under the weight of a stronger currency that has triggered an avalanche of cheaper imports from emerging market peers like China and Mexico. The government aims to achieve growth of no less than 4 percent this year, while a weaker currency, which has lost about 5 percent of its value against the dollar this year, is now helping by making export-focused industries more competitive. Tombini ruled out resorting to macroprudential measures to avoid raising interest rates as they were best used for managing imbalances in financial and credit markets rather than the broader economy. He said adjustments to the benchmark Selic rate remained the best way to control inflation while such imbalances were absent. Tombini described the Brazilian economy as solid, with $374 billion in international reserves and net public debt of around 36 percent of GDP. He said the recent weakening of the Brazilian currency, the real, had also helped to reduce overall debt, since Brazil is a net creditor in dollar terms. Tweet this Link this Share this Digg this Email Reprints Comments (0) Be the first to comment on reuters.com. Add yours using the box above.

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