Government Benchmark Selic Rate Cut 0.5% to 11%-Minimum

Salaries Up 14.3% to R$622.73 in January

São Paulo and Brasilia– Two moves to stimulate the economy were announced today as the year ending will produce growth figures below those of the last few years. The Central Bank decided to reduce the benchmark Selic rate, a bellwether similar to Prime Rate, by half a percentage point, from 11.5% down to 11%.

 

The government also formalized the new minimum wage to take effect in January at R$ 622.73 per month. Growth for the year should finish at about 4.5%, well below the blistering pace of the last few years. The government move to stimulate the economy should assure nervous investors who worried about the economy “overheating.” The government is clearly more concerned about the opposite.

 

During the preceding 3 years the government raised the Selic rate to put the brakes on rapid growth fearing a round of inflation. It is now back to its lowest level in two years. Despite Selic´s relatively low nominal rate, Brazil still has by far the highest real rates of interest in the world, that is the nominal rate, 11.5%, less the current monthly inflation figure of roughly 7% for the trailing twelve months, yielding a figure of 4.5% real interest, after inflation. Single family residential mortgages with 20 year fixed rates are offered at rates between10.5% and 12%, for example.

 

At the same time an increase of 14.3% in the basic monthly wage raised the minimum from R$545 to R$622.73. Workers ´earnings are usually expressed as multiple of the minimum. Figures of a study released earlier this month showed that the average earnings of employed persons throughout Brazil were R$1,600 per month, across all regions of the country and across all sectors of industry. As of January that figure would be express as 2 and a half “salaries,” though the average will now rise to reflect the increase.

 

Treasury officials said the move was expected to inject R$ 64 billion into the economy during 2012. The hope is that the added liquidity will get the economy moving at a faster pace, while the higher interest rates keep inflation in check.

 

The “raise” will directly affect an estimated 66 million persons who will enjoy a real increase in their purchasing power of about 7.3%, after adjusting for inflation.