The Brazilian government is scrambling its monetary policy to fend off further falls in industrial production and to boost flagging GDP. In the latest move, the government has cut obligatory minimum rates in savings accounts. There are likely to be more rate cuts to come particularly in the absence of a coherent fiscal policy to boost industry.
A fierce series of interest rate cuts has brought rates down to 9% in nominal terms, less than 4% in real terms. Until recently, that was seen as the end of the line. Now, there are signs that the Central Bank is going to risk pushing rates even lower. Together with a push to slash bank spreads and boost the economy through credit, this could push Brazil into danger territory and risks reigniting inflation, long the Achilles’ heel for Brazil.
So far, there has been little attempt to use fiscal policy to help out industry except in a rather cag-handed way of favouring those industries that clamoured most loudly. It seems that all the onus will stay on monetary policy with the expectation that a depressed global economy will restrain inflation.
Lower rates have already had a significant effect on the real, now at its lowest levels in three years. That should help sustain foreign direct investment: many canny managers had been increasingly reluctant to make investments in a country with an overvalued currency and were considering other locations in Latin America. They are likely to now look afresh at Brazil: they should be wary of the sting of inflation.