* Central bank cuts Selic rate to 8.50 pct from 9 pct
* Weak economic recovery prompts 7th straight rate cut
* Lower interest rates a priority of Rousseff gov't
By Alonso Soto
BRASILIA, May 30 Brazil's central bank cut
interest rates on Wednesday for the seventh straight time to a
record low 8.50 percent, moving into uncharted territory in a
bid to shield a fragile recovery from a gloomy global outlook.
President Dilma Rousseff has made lower interest rates one
of the top priorities of her government, which is struggling to
steer the economy back to the 4 percent-plus growth rates that
made Brazil one of the world's most attractive emerging markets
in the last decade.
Despite concerns among some investors over inflation, the
central bank's monetary policy committee, known as Copom, voted
unanimously to lower the benchmark Selic rate 50 basis points
from 9 percent. That was in line with market expectations and
represented a more conservative cut than the 75 basis-point
reduction at the last rate-setting meeting in April.
"At this moment, Copom believes that the risks to the
inflation outlook remain limited," the bank said in a statement
that accompanied the decision. The statement used the exact same
language as the previous statement in April.
With Wednesday's cut, the central bank has now lopped 400
basis points off the Selic rate since August 2011, when it
surprised markets by starting an easing cycle despite widespread
concerns at the time about surging consumer prices.
Inflation has eased since then with some help from a
sluggish global economy, bringing the rate to 5.05 percent in
the 12 months through mid-May - well below the 6.5 percent
ceiling of the central bank's target range.
That has allowed the central bank to test the boundaries on
interest rates, ushering in what some economists predict might
be a new era of lower borrowing costs for Brazil.
Wednesday's rate cut marked a slowdown in the pace of easing
after two straight reductions of 75 basis points in March and
April. The central bank signaled after its April policy meeting
that future rate cuts might be more cautious.
The previous low for the Selic was set in 2009, when the
central bank in the administration of former President Luiz
Inacio Lula da Silva slashed the rate to 8.75 percent to fend
off the global financial crisis.
Growing fears of a Greek exit from the euro and a global
credit crunch will likely prompt more rate cuts by the central
bank as it tries to aid government efforts to revive activity.
"The central bank did what was expected, highlighting the
external environment," said Silvia Matos, an economist with the
Brazilian Institute of Economics at the Getulio Vargas
"The bank also showed that it is not bothered with
inflation, this is not a problem for them. I think it's very
clear that the bank will keep cutting the Selic."
Some economists worry the bank is overlooking high inflation
expectations for next year to focus on economic growth now.
Since taking office in January 2011, Rousseff has sought to
bolster Brazil's economy with a barrage of tax breaks and credit
incentives for targeted industries, with the latest measures
Rousseff is also trying to create conditions for Brazilian
interest rates - long among the world's highest - to continue
falling by keeping a lid on public spending and pressuring banks
to lower rates on both corporate and individual loans.
In a politically sensitive move, her government recently
scrapped the fixed rate of return on domestic savings accounts,
removing one of the main obstacles preventing interest rates
from falling further.
For the last century, savings accounts carried a fixed
return of about 6 percent annually, which, once tax incentives
and other factors were taken into account, amounted to a de
facto floor for the Selic rate at its current level.
Brazil's high interest rates are a legacy of the days of
runaway inflation in the late 1980s and 1990s, a traumatic era
that has left policymakers and politicians of all stripes
extremely wary about price stability. The Selic rate hit a
record high of 45 percent in 1999, just after Brazil underwent a
painful currency devaluation.
MONETARY POLICY LAG
Brazil's economy has been slow to react to the steep drop in
borrowing costs and the government's stimulus measures.
Gross domestic product is expected to have expanded just 0.5
percent in the first quarter from the previous quarter,
according to the median forecast of 29 analysts surveyed by
Reuters. Official GDP data is due out on Friday.
In an interview with Reuters on Monday, Finance Minister
Guido Mantega acknowledged the economy could grow 3 to 4 percent
this year, down from an initial forecast of 4.5 percent. Brazil
grew only 2.7 percent in 2011, behind most regional peers and
The slowdown has been a disappointment for an economy that
surpassed Britain last year as the world's sixth largest. It has
put renewed focus on the need for deeper economic reforms in
Brazil to resume higher growth rates.
Central bank chief Alexandre Tombini has said the pace of
the recovery is slower than expected, but reiterated that the
effects of the easing cycle and government tax breaks will be
felt later this year.
Most market economists forecast the Selic will end the year
at 8 percent and stay in single digits for most of Rousseff's
term in office, which runs through 2014.
Tombini, who helped set up the bank's inflation-targeting
regime in 1999, has come under criticism by some who say he is
succumbing to pressure from Rousseff to aggressively cut rates
even as inflation expectations remain high.
He has denied any political interference and says the
evolution of the Brazilian economy has allowed for lower rates.