Brazil’s central bank, Banco Central do Brazil, raised interest rates as expected yesterday, April 27.
But the bank also did the unexpected. The increase in the benchmark Selic rate to 9.5% from 8.75% was more than most economists and analysts had expected. 30 of the 54 economists and analysts surveyed by Bloomberg before the increase had projected a 0.5 percentage point move instead of the actual 0.75 percentage point hike.
The interest rate increase is the first by any Latin American bank in more than a year.
In a one sentence statement announcing the decision the central bank didn’t indicate how fast or far interest rate increases would go. But economists say that the bank is likely to raise rates at its next four to six meetings.
The rate increase is a response to forecasts predicting that in 2010 the Brazilian economy will grow by 6% or more. Inflation was already running at a 5.2% annual rate in the 12 month that ended in mid-April. That’s well above the central bank’s target inflation rate of 4.5%. Forecasts now call for inflation to climb to 5.4% by the end of 2010.
Brazil is used to high interest rates: the 8.75% Selic rate before this latest move was the lowest benchmark interest rate on record.
But in real terms—that is after subtracting the inflation rate from the interest rate—the current real interest rate of 4.3% is the third highest in the world after that in Latvia and Croatia. A real interest rate that high will attract more overseas cash to Brazil and strengthen an already strong Brazilian real. The currency gained 1.3% yesterday against the dollar and is now up 26% in the last 12 months versus the dollar. That won’t help Brazilian exports, which get more expensive every time the real appreciates against the dollar or other currencies. Among Brazil’s biggest trading partners, one, the United States, uses the dollar, and a second, China, has pegged its currency to the dollar.
How high will Brazil’s interest rates go? Last week Morgan Stanley predicted that it would take a four percentage point increase to beat back inflation. The last time the central bank raised interest rates the total increase for the cycle came to 2.5 percentage points. Yesterday’s 0.75 percentage point move looks like just a down payment.
Mr Jubek- Would be nice to see your thoughts on why EWZ,BRF etc.. are all moving up on the Brazil rate hikes?
Thanks
Astrid,
I’m taking a “wait and see” approach with Brazil. I think it’ll be a solid buy later this year. You could probably dump BRF and buy it back at a cheaper price later this year.
So does this mean we are still bullish on Brazil? Or do I dump my BRF?
> However, if the selected currency loses value versus the U.S. dollar, you could experience a loss of principal.
This is the currency risk that we are willing take, I guess. But the money is FDIC insured (up to 250K) against institutional failure, insurance you can find only in US bank accounts.
Here is a quote from everbank – use caution!
Returns based on a fixed interest rate and potential appreciation in the selected foreign currency versus the U.S. dollar. However, if the selected currency loses value versus the U.S. dollar, you could experience a loss of principal.
bsdgv… thanks for the idea with Everbank. Will have to check this out. 5% for 3 months sounds more attrative than 1% for a year.
bsdgv,
Just checking the website, it looks like a good idea. Although I will say Everbank is making some good money off this, considering most Brazilian banks are offering in the 8% neighborhood.
> Is there any way to put money to work in brazil and get the 9.75% that they are chargiing for interest? Brazilian bonds? ect?
You can buy 3-month CD’s (in Reals) that currently pay 5.09% APY from EverBank. You can take advantage of Real rising against dollar and get 5.09% while waiting.
http://www.everbank.com/001CurrencyCDSingle.aspx
Would this be a good idea, Jim?
“Set guidance lower than analyst expectations”, I should have said.
Jim, do you have any thoughts on the POT earnings release today? It seems reaction was positive but muted, perhaps because they lowered their guidance for the rest of 2010?
A couple of years ago I looked in vain for a way to buy into Brazil’s interest rates. Pretty much can’t be done by ordinary mortals.
In any event, my Brazilian stocks took the interest hit, said “ooh that smarts”, then got back up and are back where they were before. So far, I’m glad I’m holding on.
greedibanks:
Currency valuations are strengthened when central banks raise interest rates. …probably just that…
Is there any way to put money to work in brazil and get the 9.75% that they are chargiing for interest? Brazilian bonds? ect?
Ok then maybe someone can explain why BRF etf is… going higher today? Same for EWZ.