Brazil Monetary Policy


COPOM reduces interest rates by 0.50% for third time

At its 30 November meeting, the last for 2011, the Central Bank's Monetary Policy Committee (COPOM, Comite de Politica Monetaria) decided to reduce the SELIC interest rate by 50 basis points to 11.00% in a unanimous vote. This was the third consecutive meeting in which policymakers opted to cut interest rates by 50 basis points, cutting the SELIC rate a cumulative 150 basis points since the end of August. The decision was widely expected by the market and was in line with the Consensus Forecast participants' expectations. COPOM's decision was made amid a deteriorating global economic scenario, as Europe struggles to contain debt turmoil and major economies cannot escape a liquidity trap. Furthermore, recent indicators suggest that the Brazilian economy has slowed in the third quarter. Policymakers expect that a combination of external risks and lower economic growth at home should translate into lower inflationary pressures going forward. In fact, inflation moderated from 7.3% in September to 7.0% in October. Although inflation remains above the Central Bank's target, monetary authorities expect it to return to within the target range in 2012. Moreover, on 1 December, the Finance Ministry announced several fiscal stimulus measures in order to boost economic growth and shield the economy from the external shocks. The measures included the elimination of the IOF transaction tax on foreign purchases of Brazilian equities and corporate bonds with a maturity of more than 4 years (at the same time maintaining the tax on foreign purchases of shorter term bonds). Moreover, the government announced a reduction of the IOF tax on personal loans from 3.0% to 2.5% and a smaller IPI tax on several consumer goods (both durables and non-durables). The measures are estimated to reduce the tax revenue by USD 560 million in 2012.


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