Policy makers, led by central bank President Alexandre Tombini, reduced the Selic rate by 0.75 percentage point to 9.75 percent, surprising 59 of 62 analysts who expected it would be lowered by a half point for a fifth straight meeting. The move was anticipated by two analysts, while one forecast a one percentage point cut, according to a Bloomberg survey.

“Giving continuity to the adjustment process of monetary conditions, the Copom decided to reduce the Selic rate to 9.75 percent a year, without bias, by five votes in favor and two votes for the reduction of the Selic rate by 0.5 percentage points,” policy makers said in their statement posted on the central bank’s website.

Industrial production in January had its biggest drop in more than three years as global demand slowed and a rally in the real made imports cheaper. By reducing borrowing costs, President Dilma Rousseff’s administration is trying to fuel investment in the second-biggest emerging market after China and discourage foreigners from flooding the economy with dollars seeking higher-yielding assets.

“The central bank shifted its strategy,” said Roberto Padovani, chief economist at Votorantim Corretora, in a telephone interview from Sao Paulo before the rate cut was announced. “The economy is growing below potential, there is ample liquidity in the global markets and the risk of inflation accelerating in the short term is low.”

Bigger Cut

Tombini began lowering the benchmark rate in August after raising it through the first half of last year, saying “moderate” reductions in borrowing costs would shield the economy from the euro debt crisis. In January the bank said there was a “high probability” the rate would drop to less than 10 percent as inflation concerns subside.

Since Brazil began targeting inflation in 1999, the Selic has only once before fallen below 10 percent, in the wake of the 2008 global financial crisis.

Traders began boosting bets for a bigger rate cut this month as evidence mounted that the economy is growing at a level weaker than was previously expected. The yield on the interest rate futures contract maturing in January 2013, the most traded in Sao Paulo today, has fallen 42 basis points to 8.91 percent since Feb. 28.

Currency Concerns

The 2.1 percent decline in industrial output in January, the biggest drop since December 2008, followed a report this week showing that the $2.3 trillion economy last year had its second-worst performance since 2003. Gross domestic product expanded 2.7 percent in 2011, less than most of Brazil’s neighbors and even below the 3 percent growth posted by Germany amid the euro region’s crisis.

Besides cutting borrowing costs, Rousseff’s government has cut taxes on consumer goods and is boosting public investments to ensure 4.5 percent growth this year.

The rate-cutting strategy also helps ease pressure on the currency, whose gains are hurting manufacturers competing with cheaper imports.

Brazil’s benchmark rate is a magnet for investors borrowing at near-zero rates abroad. So far this year, $15.5 billion has entered the country, compared with investment outflows of $3 billion in the last quarter of 2011.

Inflation

Rousseff, on a trip to Germany this week, said her government wouldn’t spare efforts to protect manufacturers from a “monetary tsunami” triggered by loose credit conditions in Europe and the U.S. that are “artificially devaluing” the euro and greenback. She cited as an example the government’s recent decision to boost taxes on some foreign loans.

The real has strengthened 5.7 percent against the dollar this year, the fourth-biggest gainer among the 16 most-traded currencies tracked by Bloomberg.

While growth and industrial production have slowed, inflation in Brazil has remained above the government’s 4.5 percent target since September 2010, as rising wages and near- record low unemployment feed demand. A surge in investment as Brazil prepares to host the 2014 World Cup, 18 percent credit growth and the government’s decision to raise pension payments by 14 percent are also pumping more cash into the economy.

Policy makers are counting on weak global growth to provide some relief, and point to a slowing in the pace of consumer price increases to 6.22 percent in January from 7.31 percent in September.

Tombini has repeatedly stated that inflation will subside to 4.5 percent by the end of the year. Still, economists are doubtful, forecasting in a March 2 central bank survey that consumer prices will rise 5.24 percent this year and 5.2 percent in 2013, prompting policy makers to boost the benchmark rate back to 10.50 percent next year. The same survey shows economists expect growth this year of 3.3 percent.

To contact the reporters on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Raymond Colitt in Brasilia at rcolitt@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

http://www.bloomberg.com/news/2012-03-08/brazil-cuts-benchmark-rate-greater-than-estimated-0-75-as-economy-slows.html

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