Brazil lowers interest rate to 26%

The Miami Herald, Posted on Thu, Jun. 19, 2003 BY KEVIN G. HALL khall@krwashington.com

RIO DE JANEIRO, Brazil - Brazil's central bank slightly lowered its overnight basic lending rate Wednesday for the first time in 11 months and the first time since President Luiz Inacio Lula da Silva took office Jan. 1.

In a sign that the Brazilian government is regaining investors' confidence, the bank's monetary policy committee reduced the interest rate, called the Selic, by half a percentage point, to 26 percent.

Brazil's overnight lending rate remains the third-highest in the world, trailing only Turkey and Venezuela.

Brazil had raised interest rates five times since October, the month Lula was elected, the final time in February under his presidency.

The higher rates were aimed at inducing foreign investors to keep their money in Brazil despite fears that Lula, a critic of U.S.-backed economic policies, would abandon the free-market reforms his predecessor had adopted.

Wednesday's action is unlikely to quiet what has become the first major controversy of Lula's government. An avowed leftist, Lula spooked financial markets after his victory. Since taking office, he has been ultra-orthodox in managing the economy.

Economic analysts in Brazil think interest rates should fall further, given that the currency has been stable for months against the dollar.

''It is very clear there was enough space to cut up to 2 points on interest rates,'' said Daniel Tha, an analyst with economic consultant Global Invest in Curitiba.

High interest rates are slowing South America's largest economy, which isn't expected to grow by more than 2 percent this year.

Lula took office promising a ``confidence shock.''

But Tha and other analysts complain that the high interest rates stifle consumer spending and hurt the stock market, because investors won't gamble on stocks if they can earn 26 percent on government bonds and other debt instruments.

''They are forgetting to look at the real economy, where people are hurting,'' Tha said.

In a speech Tuesday, Lula asked Brazilians to be patient about the economy and his promise of new jobs.

''We have spent six months fixing the house, conquering the confidence [of investors] that was needed,'' he said.

Inflation in May was at a 17.2 percent annual rate, the highest since 1996. The central bank predicts 7.76 percent inflation over the next 12 months.

Earlier this month, Brazil sold international investors $1.25 billion in 10-year bonds. The government said it was a clear sign that Wall Street saw healthy long-term prospects for Brazil.