By Fabio Alves
Aug. 30 (Bloomberg) -- Brazil's central bank lowered the benchmark lending rate for a 10th straight time in a bid to bolster a flagging economic expansion.
The nine-member board led by bank President Henrique Meirelles voted unanimously to cut the overnight interbank rate a half-point to 14.25 percent, the lowest in at least 20 years. The cut, bigger than the quarter-point median forecast in a Bloomberg survey of 31 economists, brings the rate down 5.5 percentage points since September 2005.
Policy makers are looking to speed up a recovery that has showed signs of faltering in recent months, dragged down by a currency rally that has eroded profit margins for exporters and prompted some of them to pare output and reduce staff. Economists such as Italo Lombardi at IdeaGlobal said the rate cuts may help fuel faster growth in Latin America's biggest economy before yearend.
``I expect economic activity to recover in the third and fourth quarters,'' Lombardi said in a telephone interview from New York.
Economic reports the past few weeks have been weaker than analysts expected.
Brazil's jobless rate jumped to a 15-month high of 10.7 percent in July, above the 10.2 percent median forecast in a Bloomberg survey of 14 economists. Industrial output fell 0.6 percent in June, the second decline in three months. Retail sales -- as measured by volume -- rose 4.1 percent in June from a year earlier, less than the 5.1 percent median forecast in a Bloomberg survey of 11 economists.
Lowering Forecasts
``Growth in the second quarter will likely be below than what the market is expecting,'' Lombardi said.
Economists are already expecting a sluggish second-quarter. They estimate growth slowed to 2 percent in the quarter from 3.45 percent in the first quarter, according to the median of 25 estimates in a Bloomberg survey. The report is due out tomorrow.
Analysts have also been cutting their full-year growth forecasts, according to a weekly central bank survey. They predict growth of 3.5 percent for this year and next, according to the survey of about 100 economists published on Aug. 28. In the survey published three weeks earlier, the median forecast was 3.6 percent for this year and 3.7 percent for next year. Brazil's economy expanded 2.3 percent in 2005.
The currency rally -- fueled in part by high prices abroad for the country's commodity exports -- has led manufacturers such as Volkswagen AG to fire workers. Wolfsburg, Germany-based Volkswagen fired 160 employees last month at its plant in Taubate, a town in Sao Paulo state. The company has also given a 10-day paid leave to 3,400 workers at its plant in Sao Bernardo do Campo, in the outskirts of Sao Paulo city.
Slowing Exports
The real has surged 51 percent since May 2004, the biggest gain among the 16 currencies most-traded against the dollar. The real was little changed today, falling 0.02 percent to 2.1375 reais to the dollar at 5:55 p.m. New York time today. President Luiz Inacio Lula da Silva, who faces re-election in October, said as recently as June that he wanted a weaker real to help exporters.
Export growth has stagnated this year. Exports -- as measured by volume -- rose 3.2 percent in the first seven months of the year, less than the increase of 11.4 percent in the first seven months of 2005, according to Pedro Tuesta, chief Latin America economist at 4Cast Inc., a Washington-based research company.
`Overriding Concern'
The currency rally has also driven down the country's inflation rate to a seven-year low by making imports cheaper. Inflation, as measured by the government's IPCA price index, slowed to 3.8 percent in the 12 months through mid-August from 4 percent at the end of July and from 5.7 percent in December. The rate, the lowest since 1999, is below the government's 4.5 percent annual target for this and the next two years.
``The overriding concern of the central bank now is what happens next year, making sure inflation will be at the 4.5 percent target set for 2007,'' Alberto Ramos, senior Latin America economist at Goldman Sachs Group Inc. said in a telephone interview from New York.
To contact the reporter on this story: Fabio Alves in Brasilia at at Falves3@bloomberg.net
