02/27/2014 – 08h27
With prospects for economic growth currently looking bleak, in what is an election year, Brazil’s Central Bank has decided to slow the pace of rising interest rates.
In a statement published on Wednesday night, the Central Bank said that the Selic rate – the bank’s overnight rate – will rise from 10.5% to 10.75% for the year.
In an attempt to control inflation, the rate had risen by 0.5% for the last six instances. Inflation has remained above government targets since the end of the Lula administration in 2011.
In a statement, the Central Bank said it was “proceeding with the process of adjustment of the base interest rate, which began in the meeting of April 2013.”
The measure will take interest rates back to the same percentage as at the start of President Dilma Rousseff’s mandate. Rousseff made reduction of interest rates a political priority.
A year ago, the Selic rate stood at just 7.25%, the lowest figure since the rate was created in 1986. However, this did not produce the expected rise in consumption and investment.
GDP growth for 2013 stood at around 2%, with exact statistics due to be released tomorrow. For this year, analysts and investors expect an even lower rate.
Along with sluggish growth, other government policies and events in financial markets have influenced the decision to slow the increase of interest rates, even with prices rising faster than they should be.
The most eye-catching policy announced was the introduction of a primary surplus target, for the savings that governments make in order to reduce public debt. For 2014, this will be equivalent to 1.9% of GDP.
Since last year, the government has pursued contradictory fiscal objectives. On the one hand, it has made credit more expensive, in order to control consumption and prices; on the other, it has increased spending, to inject more money into industry and commerce.
This contradiction becomes more apparent, and appears risky, when the rising value of the dollar against the real is taken into account. This is a result of the ongoing recovery of the American economy.
A steeper rise in the value of the dollar would make imports more expensive, increase inflation and render a higher interest rate necessary. These fears, however, have become less urgent in the last few days.