Brazil says global economic outlook led to rate cut

SAO PAULO: Brazil's central bank said on Thursday that its surprise 50 basis-point interest rate cut was justified by the deteriorating global economy, adding that tighter fiscal policy and reduced demand at home should allow inflation to start easing in coming months.

In minutes from its Aug. 30-31 monetary policy meeting, the bank focused more on problems abroad than signs of an economic slowdown at home. It said it would continue to be vigilant with inflation at a six-year high and rising, but it saw risks receding from commodities price shocks and an output gap.

Last week's rate cut surprised investors, most of whom had expected no change to rates because inflation has continued to rise at a worrying pace in Brazil, with prices up 7.2 percent in the 12 months through August.

The decision also split the bank's board, with two of its seven members voting against the rate cut. The bank said in its minutes that those two members believed the moment was not yet right for a monetary easing cycle.

"The Copom (monetary policy committee) unanimously recognizes that the international macroeconomic environment was altered substantially since its last meeting, justifying a reevaluation and, ultimately, a reversal of the recent process of raising the base interest rate," the bank said.

"Nevertheless, two Committee members judged that the current moment still does not offer the necessary conditions for this shift to take place yet," the bank said.

The bank said that the cycle of rising inflation on a 12-month basis should end this quarter.

Officials told Reuters this week that the rate cut was motivated in large part by new data showing signs of a sharper than expected economic slowdown in Brazil, with a contraction in activity possible in coming months.

Copyright Reuters, 2011