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Brazil remains on track for end to interest rate increases by December

posted on July 6, 2010 at 10:30 am
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As headlines go yesterday’s “Brazilian economists raise forecasts for interest rate increases” is no “Dewey defeats Truman.”

But it is still downright misleading. If all you read is the headline, you’re likely to come away with a belief that the turn in Brazil’s interest rates is much further off than anyone expected and that the day to invest in Brazilian stocks has been pushed way out into the future.

Exactly the opposite is actually the case. Those pessimistic economists are just confirming a forecast that sees Brazil’s central bank ending the interest rate increases that are slowing the Brazilian economy and putting additional downward pressure on Brazilian stocks in December 2010. 

Here’s what’s behind the headline. With the Brazilian economy growing faster than expected and inflation kicking up more than expected, Brazilian economists now believe that the Banco Central do Brasil won’t stop raising interest rates until the benchmark Selic rate hits 12.13% in December.

That’s a huge change, NOT, from earlier forecasts that called for the central bank to raise rates to 12% in December before stopping.

 Yep, that’s it. The forecast is still for an end to interest rate increases in December. But now economists believe the end of the year benchmark rate will soar 0.13 percentage points above earlier forecasts.

If you want to see that as big news, go right ahead. Me? I see it as confirmation that the bank will be done at the end of the year and the benchmark rate then will be somewhere around 12%.

If you do the math that seems to be an extremely likely outcome. The current benchmark rate is now 11% after the Banco Central raised rates by 0.75 percentage points at its last meeting. Economists expect that the bank will raise the Selic rate another 0.75 percentage points at its July 20-21 meeting. That would leave the bank just 0.38 percentage points from the 12.13% rate that economists are forecasting for December.

Given that economists are expecting another 0.75 percentage point rate increase at the September meeting of the central bank, I’d have to say that there’s a good chance for a September surprise when the bank raises rates less than expected.

Add in the likely slowing of Brazilian exports as growth in both China and the European Union slows and I think the end of the year target for rates stands a good chance of being correct.

That would let Brazil’s central bank gradually lower rates in 2011 if the economy falters or inflation slows. Brazil’s benchmark rate hit an all-time low of 8.75% in March. A return to just that level gives the bank a whole lot of room if it needs to keep growth in Brazil humming.

 The U.S. Federal Reserve and the European Central Bank would give their striped ties for that kind of margin in interest rate policy.

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  • amtrend10 on 6 July 2010

    As the Brazilian govt is pressuring their commodity producers to develope more refined products and creating their own shipping capabilities, infrastructure expansion is inevitable. Employment should continue to rise, inflation is being controlled and money is flowing freely (abeit expensive by today’s standards). Brazil has been good to me but I still keep one eye on the political scene. This regime has an economic growth agenda and has done an excellent job but a jealous crime lord or an ambitious neighbor has ruined too many similar scenareos in the past. I hope not. This expansion should be measured in years and is a wonderful story for other third worlders to follow but I think I will subscribe to a Brazilian newspaper and make good use of that one eye.

  • amtrend10 on 6 July 2010

    Ther is also the relatively new tax on I & D by Brazil to consider.

  • DJBarber on 6 July 2010

    AgriBank Said to Raise $19.2 Billion in Share Sale (Update1)

  • Shameus on 6 July 2010

    Different subject: Ctrp plunges on cuts to airline commission rate which lowers future earning estimates. Is the sell-reaction over stated? Is it worth holding on? Advice welcome!

  • marsdon1201 on 6 July 2010

    amtrend 10
    what amt. of tax on I & D are u talking about. Been waiting on CPL for div. and infrastructure growth play.

  • elnormo on 6 July 2010

    Hi Jim,

    Can Brazil sustain economic growth from internal consumption?

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