beyondbrics

Brazil’s economy is at another of those multi-speed moments that it is becoming known for.

Readers will recall that in 2010, the last year in office of President Luiz Inácio Lula da Silva, economists complained that Brazil had one foot on the brake and one on the accelerator. The foot on the brake was interest rates as the central bank ramped them up to try to keep inflation under control while the accelerator was, of course, fiscal spending as the outgoing president kept the budgetary pedal to the metal as his anointed successor, Dilma Rousseff, contested an election that year.

Now Brazil is in the strange position of having record low unemployment – 4.7 per cent in December compared with 5.2 per cent in November, even as its economy crawled along at near zero rates of growth in the third and fourth quarters.

Perhaps, there is a third speed that we didn’t previously know about, too. In spite of the all-time low jobless rate and stubborn inflation – which remains near the top of the upper end of the central bank’s target range of 4.5 per cent plus or minus 2 percentage points – it seems the benchmark Selic interest rate is also headed for near record lows.

The central bank predicted in the minutes of its meeting last week (released on Thursday), during which it cut rates to 10.5 per cent in the fourth 50-basis point cut in a row, that the Selic would fall into single digits this year. This would be a remarkable achievement. Brazil’s high real interest rate is seen as one of the most sticky and unconstructive legacies of its decades of runaway inflation.

But the question is whether the Selic can be held down at such levels. With unemployment so low, large above-inflation increases in wages coming through this year and the economy showing signs of recovery, the central bank may have slashed rates only to be forced in a couple of months to put them back up again to address a resurgence in prices.

All of Brazil will be hoping that the instincts of the central bank governor, Alexandre Tombini, which have so far proven uncannily accurate, will be correct again.

Related reading:
Brazilian interest rates: snip snip, beyondbrics
A high-flyer now flags, FT
Brazil slowdown presents chance to reform, FT
Brazil moves up a place in GDP, beyondbrics