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Real Problems in Brazil

President presses for lower interest rates, raising fears of a backlash.

Brazil, home to some of the highest interest rates in emerging markets, is fast moving to a lower-­rate climate, but the government’s aggressiveness in forcing the pace runs the risk of backfiring. Banco Central do Brazil cut its policy rate, the Selic, by 50 basis points, to 8.5 percent, late last month. With the move the central bank has slashed its key short-term rate by 400 basis points since August. Brazilian rates have fallen as softer Chinese demand for commodities and the impact of a strong real have slowed the economy sharply. Most economists believe the country will struggle to achieve 3 percent growth this year, below the government’s 4.5 percent target. Having committed to fiscal restraint, President Dilma Rousseff sees lower rates as one of the best options for stimulating the economy. In a televised May Day speech, she bashed banks for keeping loan rates high even as the central bank was easing. According to the central bank, average lending rates stood at 35.3 percent in April, a level that Rousseff called “unacceptable.” The jawboning attempt, at a time when the government was pursuing a multi­billion-­dollar tax claim against mining giant Vale and Argentina had just seized oil company YPF, raised fears of wider intervention in the economy. “Brazil couldn’t have picked a worse time to do something like this,”  ­William Landers, senior portfolio manager of BlackRock’s Latin American funds, told an investors’ conference in Rio de Janeiro late last month. Government pressure could be counterproductive if lower rates spark a rise in inflation, currently just over 5 percent, said Jonathan Weinberger, head of Americas debt capital markets at Société Générale. Most big investors remain confident about Brazil despite the slower-­growth outlook and the rate flap. “We have rules. We respect contracts. We have a clear monetary policy targeting inflation,” said Marco Geovanne, a director of the $150 billion Banco do Brasil pension fund Previ. He sees the Selic falling to 8 percent.

Paul Griffiths, head of fixed income at Aberdeen Asset Management, said the U.K. firm is looking to add staff in Brazil as part of an emerging-­markets buildup. “We see Brazil as a key investment,” he said.

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