Fears that the world's most powerful emerging economies are flagging have gained ground after Brazil and South Korea cut interest rates to boost growth.
Brazil cut its main interest rate to a record low of 8% on Thursday, while South Korea shaved 0.25% off its benchmark rate to 3%. The 0.5 percentage-point cut by the Brazilian monetary policy board (Copom) comes as policymakers scramble to revive an economy that has failed for nearly a year to respond to stimulus measures. It was the eighth consecutive cut since last August, when the rate stood at 12.5%. Until last summer, Brazil, like many emerging economies, was suffering from a massive influx of funds in search of bumper returns. An oil and agriculture boom encouraged huge investments in the financial sector and other areas that promised quick returns. The worsening of the eurozone crisis reversed the trend as fund managers sought havens such as US and German sovereign bonds. Trade with the US maintained economic growth for several months, but recent surveys have shown a combination of a faltering US economy and the eurozone crisis have dampened the demand for Brazilian goods. On Wednesday, government data showed that retail sales plunged in May, undermining hopes for a sector that Brazil's government had long hoped would keep the economy alive. The slower-than-forecast recovery in the world's No 6 economy and a moderate pace of inflation have bolstered the case for the continuation of Brazil's aggressive rate-cutting cycle, economist said. "At this moment, Copom believes the risks to the inflation outlook remain limited," the bank said in its decision statement, which was identical to the one after its previous rate-setting in May, when it also cut by 50 basis points. The language used in the statement left the door open for more rate cuts, analysts said.
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MADRID—Spain's new central bank chief said the bank failed to act swiftly after the country's housing market crashed half a decade ago, a rare show of self-criticism of national institutions that comes as Spain enters the last stretch of negotiations on the details for a banking bailout.
Bank of Spain Gov. Luis Maria Linde's speech in Parliament on Tuesday was his first significant statement since he was appointed by conservative Prime Minister Mariano Rajoy a month ago, replacing Miguel Ángel Fernández Ordóñez , a Socialist appointee. It also is an indication that Spain's political elite is starting to come to terms with the unexpected collapse of what was once called "the Spanish miracle," largely driven by mounting problems in a banking system that many had once hailed as one of the world's strongest, even after the 2008 Lehman Brothers' bankruptcy.
Senior Spanish officials, faced with growing popular resistance to more austerity cuts, until now sought to pile pressure on European Union institutions to do more to help the euro-zone's fourth-largest country. Mr. Rajoy and other members of the government have said Madrid has done its part and EU partners, together with the European Central Bank, must now do theirs to ensure that Spain's borrowing costs fall from the current unsustainable levels.
Finance Minister Luis de Guindos kept up that refrain Tuesday, saying at a public event that the EU's "extremely slow" decision-making process is hindering Spain's recovery.
Relations between the government of Mariano Rajoy and Brussels, as well as some other European governments, have been occasionally awkward since it took office in December. Mr. Rajoy was seen as moving slowly on dealing with a budget deficit, and as having stumbled in its handling of the banking crisis.
The new Spanish prime minister upset fellow leaders when he announced a "sovereign decision" to increase Spain's budget deficit target for this year, and comments by other Spanish officials about other governments' duties to Spain have irritated their counterparts. This was followed by newspaper reports suggesting Italian Prime Minister Mario Monti blamed Spain for heightening Italy's crisis.
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