Brazil Cuts Interest Rates to Record Low to Stimulate GDP Growth

Prime Minister Cameron and President Rousseff outside No. 10

As less consumer spending and lower business confidence cause the Brazilian economy to slow, President Rousseff looks to boost growth by cutting and simplifying taxes while the Central Bank cut interest rates. President Rousseff just met with Prime Minister Cameron at No.10.

Brazil’s economy has been slowing down and economists’ outlook for Brazil’s economic growth in 2012 is 1.9%, and unchanged according to a recent survey. The survey’s results are the median forecast of analysts polled by the central bank at about 100 financial institutions.

That would be the weakest growth in the world’s No.6 economy since 2009, when it contracted slightly, and nothing like the 7.5% growth boom seen in 2010.

Authorities are slightly more upbeat, with the Finance Ministry forecasting 3% growth this year. The official estimate was revised down last week from 4.5%.

Unemployment remains at historic lows of about 6%.

Economists expect Brazil’s inflation to stay at about 5% this year and 5.5% next year, both of which is within the central bank target of 4.5% plus or minus 2 percentage points.

The central bank is forecast to cut interest rates to a new record low of 7.5% in August and then stop to assess if the economy improves as expected.

Unemployment remains at historic lows of about 6%. Rousseff’s popularity also remains at all-time highs, in part because many Brazilians see the problems as a mere pause in their country’s long-term emergence as an economic power.

Officials in Brasilia are aware, however, that the situation could deteriorate if business leaders become convinced the slowdown is permanent. Recent surveys show confidence among industrial executives at its lowest level since the global financial crisis of 2009, and second-quarter corporate earnings are expected to be the worst since that year.

The slowdown, along with efforts by Rousseff to limit increases in government spending, has allowed Brazil’s benchmark interest rate to fall to 8%. That is still high by global standards, but it is a record low for Brazil, which officials hope will stimulate consumer spending. That has not always and not recently been the case in the UK and other developed countries where low interest rates have not caused economy to boil with surging spending and investment.

Some business leaders have called for Rousseff to take even more dramatic and structural measures, such as a reform package that could substantially reduce and simplify Brazil’s taxes. Rousseff is now looking to consolidate two federal taxes known as PIS and Confins.

The two levies, which experts say often overlap and are confusing to calculate, account for roughly a third of Brazil’s federal tax collection. Their importance to the budget could make them hard to reform without losing revenue. Nevertheless, Rousseff seems determined to press ahead with tax reform. But how is a President to balance the public books while also cutting taxes? She could discuss that predicament with the fast learning expert in number 10, David Cameron, as she held talks with the Prime Minister, while visiting London for the Olympics. Perhaps, President Rousseff could even spare a moment to teach the British Prime Minister a trick or two on how to keep employment low as well as how to simplify and cut income taxes.

So far in Brazil, there has been no increase in layoffs and the unemployment remains low. However, that can quickly change with consumer sentiment deteriorating and business confidence sinking. As the UK and the rest of Europe can testify to, it is very hard to fight back from when taking too little action, too late.