Brazil announces spending cut to cool down economy

Brazilian President Dilma Rouseff - Step in the Right Direction

Brazilian President Dilma Rouseff – Step in the Right Direction

To curb raging inflation and cool down an economy that’s showing signs of overheating, Brazil announced a 50 billion reais (£19 billion, $30 billion) spending cut on Wednesday.

Finance Minister Guido Mantega announced withdrawal of all stimulus packages introduced since the onset of the global financial crisis. However, the government will not cut social spending or withdraw infrastructure projects.

Last month Brazil’s central bank had raised interest rate to 11.25% from 10.75% after both the new President Dilma Rousseff and head of central bank Alexandre Tombini took office last month.

The country’s inflation is expected to remain over 5% this year. Last year it was reported at 5.91%. The economy – largest in Latin America, recorded a growth of 7% in 2010 and is expected to grow between 4.5% and 5% in 2011.

Kathryn Rooney of Bulltick Capital Markets said: “It’s good news to come out of the Rouseff administration. This is also positive news for future ratings upgrades”, she said.

The withdrawal of stimulus package will also ensure that the central bank will have to raise rates less frequently, she added.

Some analysts however, believe that the government should have taken stronger measures to cool down inflation.

“This is sort of a missed chance because if the government wanted to trigger some positive impact on inflationary expectations, then they should have announced something closer to 70billion reais”, said Nick Chamie of RBC Markets.

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