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Brazil may target growth by cutting rates as spending falls

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Brazil's central bank plays a difficult game, balancing one of the world's most rapidly-appreciating currencies against the ever-present danger of inflation and the needs of an economy which must diversify beyond commodity production into other sectors.

For Brazil, inflation feels particularly stressful because of its experience with hyper-inflation in the latter half of the 20th century. Thought it never reached Zimbabwe-like levels, the government was forced to raise interest rates many times, and had to experiment with several devaluations and currency shifts until former president Henrique Cardoso's Plano Real finally slayed the monetary beast.

That legacy left Brazil with some of the highest interest rates amongst the world's big economies - the benchmark rate, called the Selic, stands at 12.5 percent, compared to near-zero rates in most developed nations.

On Monday, Bloomberg News reported that Brazilian finance minister Guido Mantega may be planning to shrink spending, which would give the central bank, led by Alexandre Tombini, space to cut the Selic rate and ease borrowing.

Brazil's public sector is relatively generous, providing healthcare, infrastructure, a variety of public support programs (including the famous Bolsa Familia payments) and a sometimes lavish pension system. Brazilian conservatives and some outside economists have levied criticisms against the government for not following a model more similar to the Washington Consensus, but the Labor Party government has been relatively strong in defence of Brazilian state spending.

However, any debates over Brazilian borrowing costs, public spending or currency are dwarfed in scale by similar discussions in more-developed economies. Brazil weathered the global recession better than most nations and economic growth combined with the welfare state have pulled tens of millions of families out of poverty. Right now, the main challenge remains diversifying the economy beyond the production of oil, soybeans, steel and other commodities while ensuring that the income inequality does not continue to grow.

The author is long Petrobras ( PBR ), Embraer ( ERJ ) and the Market Vectors Brazil Small-Cap ETF ( BRF ).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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