RIO DE JANEIRO, May 15 (UPI) -- Top Brazilian officials are clamoring Thursday for a cut in a key interest rate, which they say is too high to allow economic growth.
"All the conditions of the economy are pointing toward a cut in the rates," said Sen. Aloizio Mercadante, a key player within the ruling Workers' Party and a close confidant of President Luiz Inacio Lula da Silva.
Brazil's benchmark Selic interest rate sits at 26.5 percent, one of the highest in the world.
The country's central bank has steadily increased the key interest rate from its January 2001 level of 15.25 percent, mostly because of the economic turbulence caused by the Lula's rise during the 2002 election.
It was Lula's election that sent shockwaves through Brazil's economy, with international investors worried the leftist would usher in big-government policies that would lead Brazil -- Latin America's biggest economy -- to default. But since his election, Lula, as he is known, has continued with the austere economic path that his predecessor, Fernando Henrique Cardoso, set out upon during his two terms in office.
Since Lula took office on Jan. 1, Brazil has made a strong recovery.
The country's benchmark bond has strengthened some 35 percent. The local currency -- the real -- is up more than 20 percent, and equities have gained nicely.
While some analysts still point to dangers on inflation, the April reading of the benchmark IPCA inflation index recorded its lowest level in seven months, with prices rising 0.97 percent.
The answer on interest rates will come next week, when the central bank board responsible for setting them convenes its monthly 2-day meeting.
Most market players are split on whether a cut will come.
Reading the signals from Henrique Meirelles, the head of the central bank, doesn't help much. He told reporters inflation was still too high to warrant a cut in rates. But the next day, he reversed course, telling a local news agency there were "indications the country is entering a virtuous cycle."
Analysts read that latter comment as a sign a rate cut is on its way, which promptly sent the real down Tuesday, as there are still many investors who opine a cut would be premature.
Vice President Jose Alencar, long a critic of the high interest rate, said earlier this week the current level is simply "preposterous."
Alencar, while not naming names, attacked economic policymakers whom he labeled as being subservient to the "speculators," a situation which he said "we can not accept in any form."
According to Alencar, a cut of 1 percent in the interest rate would add $3 billion a year to the Brazilian economy, a benefit he says far outweighs the risks of inflation.
Analysts saw his words as a direct attack on his own government, specifically against the Economy Minister Antonio Palocci and Meirelles. Palocci, seen as the moderate face of the government, is largely credited with convincing Wall Street that Brazil's new leadership is serious about pragmatic economic policies, and wouldn't reverse the previous government's market-friendly agenda.
On Wednesday, the crowd in favor of interest rate cuts received a government report on consumer spending, as absolute proof interest rates must fall.
Retail sales in March fell 11 percent from the same month in the previous year, and many blamed the high interest rates for the drop, especially on more expensive items such as cars and household appliances.
Analysts also blamed the fall in the real in the latter half of 2002 for the trend of consumers refusing to open their wallets.
Roberto Padovani, an economist with the Tendencies consulting group in Sao Paulo, told the Estado de Sao Paulo newspaper the political brouhaha around a rate cut "is just a lot of noise" in the short term. But, he said, should a rate cut not come and the economy remains stifled, the political pot may boil over.
"In the medium term, if the macroeconomic environment remains bad and triggers more political pressure, it could cast doubts on the sustainability of the government's nucleus (of leaders), and, yes, that would become very complicated," he said.
