Tags: Brazil | Cut | Interest | Rate

Brazil Cuts Key Interest Rate to 8% to Jolt Sluggish Economy

Thursday, 12 Jul 2012 02:25 PM

Brazil has cut its key interest rate to the lowest rate ever in a move to kickstart its sluggish economy.

The central bank lowered the nation's benchmark Selic rate from last month's 8.5 percent to 8.0 percent, saying the risks of an inflationary spike are "limited."

The reduction announced Wednesday night comes as the government tries to stimulate a national economy slowed by the global financial crisis.

Brazil's central bank two weeks ago lowered its economic growth forecast for this year from 3.5 percent to 2.5 percent. The Sao Paulo Federation of Industries says this year's Gross Domestic Product will grow even less: 1.8 percent.

Brazil has prided itself on being among the nations least hit by the 2008 economic crises thanks to the growing consumption of its expanding middle class.

But with growth of just 2.7 percent last year and consumer demand diminishing, Brazil is looking more vulnerable to external economic shocks.

Paulo Skaf, president of the Sao Paulo Federation of Industries, said the interest rate reduction was "timid" and that it should have been lowered even more.

"The government has to accelerate interest rate reductions because they could help recover the country's competitiveness," Skaf told reporters.

The central bank's interest rate reduction was followed by similar moves by state-run banks Banco do Brasil and Caixa Economica Federal and private banks that have said they will start lowering their interest rates next week.

"The government has provided a stimulant for the economy that has been growing very slowly," trade union leader Miguel Eduardo Torres said. Echoing Skaf, Torres added that the government should be "bolder" and reduce the Selic rate even more.

Lower prices for Brazilian iron ore and soybeans exported to China help explain the country's economic slowdown.

Economic turmoil in Europe is cutting into demand for manufactured goods such as aircraft and Brazil's still-strong currency makes its exports less competitive.

So far, Brazil has responded to the slowdown with measures such as reducing the benchmark interest rate and taking measures to weaken the Brazilian real, which helps exporters.

Finance Minister Guido Mantega has also announced measures to boost domestic consumption: targeted tax cuts on Brazil-made products, interest rate reductions and an extension in the time allowed to pay back loans.

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2012-25-12
Thursday, 12 Jul 2012 02:25 PM
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