* Cut raises doubts over inflation, political influence
* Inflation control will require spending restraint
* Rates seen falling further in coming months
(Rewrites; adds Mantega comments, details)
By Raymond Colitt and Jeb Blount
BRASILIA/SAO PAULO, Sept 1 Brazil's shock
interest rate cut has raised concerns that the central bank is
letting its guard down on inflation and caving in to government
pressure to help cushion an economic slowdown.
The hefty cut in the benchmark rate to 12 percent from 12.5
percent at the central bank's monetary policy meeting on
Wednesday comes as inflation in Latin America's largest economy
is running at 7.1 percent.
Some economists are now questioning the bank's commitment
to pulling inflation back down to its target.
Although it cited the darkening global economic outlook,
the rate cut comes as Brazilian manufacturers suffer from a
strong currency and as government officials step up calls for a
reduction in the country's lofty rates.
"We see this decision as setting a dangerous precedent for
monetary policy in Brazil, which goes against the
inflation-targeting regime that has existed for 10 years,"
said Tony Volpon, Latin America strategist for Nomura.
The split decision to cut rates for the first time in two
years was a shock turnaround in policy in response to growing
signs of a slowdown at home as the global economy flirts with
crisis. Only weeks ago, many economists were expecting a sixth
straight rate hike this year.
The bank's policy committee, known as Copom, said it was
concerned that a sharpening slowdown in the global economy
would worsen a deceleration under way in Brazil, which grew a
robust -- but unsustainable -- 7.5 percent last year. It said
it saw inflation risks diminishing.
"A pause might have been justified, but the idea that the
world economy is going to collapse, that inflation risks are
declining rapidly, that's a real surprise," said Jankiel
Santos, chief economist with BES Investimentos in Sao Paulo.
All 20 economists surveyed by Reuters had expected the rate
to remain steady.
Brazil's stock market rallied more than 3 percent on
Thursday on hopes the cut would be followed by more and help
lift the economy, while the real currency BRBY weakened about
1.5 percent against the dollar.
Some analysts said the central bank's move was a risky bet
that assumed a global slowdown would help push domestic
consumer prices lower and that the government would relieve
demand pressures by keeping a tight grip on spending.
"The central bank has bought into a naive and innocent view
of the world economy," said Alfredo Barbutti, economist at BGC
Liquidez Corretora, a Sao Paulo-based brokerage.
"The cost of this is likely to be higher inflation."
In an interview with Reuters on Wednesday before the rate
decision, Finance Minister Guido Mantega struck a dovish tone
on inflation, saying it was already slowing to a pace
consistent with the central bank's target of 4.5 percent. For
details, see [ID:nN1E7800J7]
On Thursday, he denied the central bank had given in to
political pressure, calling such allegations "ridiculous."
"Copom doesn't suffer from any kind of political pressure,
it has autonomy. They judge conditions and make the decision,"
he told reporters in Brasilia.
Interest rate futures contracts dropped as much as half a
percentage point on Thursday as traders bet on looser monetary
The yield on the January 2012 rate futures contract
DIJF2, among the most highly traded on Thursday, dropped to
11.38 percent from 11.95 percent on Wednesday. It was the
sharpest one-day drop for that contract since the 2008 global
The surprise cut led analysts to tear up their previous
expectations for a gradual easing or no change in rates this
year. Credit Suisse analysts led by Nilson Teixeira now expect
the bank's benchmark rate to fall to 8.5 percent by January
The central bank's ability to cut rates further without
fanning inflation depends in large part on the government
making good on its commitment to maintain fiscal discipline.
The administration has sent mixed signals on that front. On
Monday it hiked its primary budget surplus target for 2011 by
10 billion reais but on Wednesday it presented a 2012 budget
that aims to increase spending. [ID:nN1E77U1CQ]
President Dilma Rousseff is facing growing discontent in
Congress after a round of budget cuts and corruption scandals
earlier this year and faces a tough challenge to maintain
(Additional reporting by Brad Haynes and Peter Murphy; Writing
by Stuart Grudgings; editing by Kieran Murray and Padraic