The Brazilian central bank cut its key interest rate by 0.25%, although it is still one of the highest in the world, it is a demonstration of trust in new policies.
Brazil’s key interest rate, the SELIC rate, was cut last week, and went from 14.25% to 14% in consideration of the new direction taken by the economy under president Michel Temer. The cut is the first in over three years, and shows a significant shift towards open market policies, as the new center-right president attempts to contain the effects of a long recession.
Just last year, the SELIC rate was hiked incessantly in order to contain a skyrocketing inflation, which delved into the double digits, as well as to mitigate the effects of an economy shrinking at over 3% per year.
This year, the economy seems to be picking up steam under the supervision of president Temer, which has been making moderate cuts to government spending in both social policies and economic policies. The Brazilian central bank acknowledged the efforts and the positive results the adjustments had on the country’s economic performance, and the cut followed.
The Bank’s monetary policy committee justified the cut assuring that “The available evidence is compatible with a recent stabilization of the Brazilian economy, and the possible gradual recovery of economic activity”. Inflation has now dipped to 8.48%, but it is still as high as that of Russia or India, and the struggle to keep lowering it should continue well into next year.
Temer said he was pleased with the decision, and a presidency spokesman echoed him in a statement. “The technical decision by the Monetary Policy Committee is a positive sign for the Brazilian economy. It corroborates the efforts made by the federal government to strengthen macroeconomic foundations and reinforces expectations regarding economic recovery, which in turn will enable Brazil to start growing again and create new jobs” read the statement.
The interest rate cut should in itself help to further stimulate economic growth, as it aids profitability for investors, as well as aiding recipients of microloans, especially entrepreneurs. Subsequent cuts are set to follow, as the signs continue to show the end of Brazil’s recession.
The positive effects of the cut should not be immediate, as credit agencies are yet to revise their evaluation of the Brazilian economy which as of now ranks among the lowest in the region. Once the three main agencies reconsider their ratings investor confidence should finally return to Brazil, which was growing at an astounding rate until 2 years ago.
Even after the cut, interest rates in Brazil are among the highest in the world, and the government is still far from its inflation target of 4.5%, but it would be unreasonable to not consider that the fiscal and monetary condition of Brazil is on the road to recovery.