Brazil to Lower Its Long-Term Interest Rates to 9%

Latin American stocks were mixed, with Brazilian shares slumping on profit taking following recent strong gains on optimism about the local economy and interest rates.

Mexican shares were also lower, undermined by disappointing inflation data. On the upside, Argentine issues jumped on bargain hunting and signs the local economy is on solid footing.

Brazil’s Bovespa Index shed 4.19 points, or 0.01%. Mexico’s benchmark Bolsa Index dipped 12.61 points, or 0.07%, while Argentina’s Merval Index jumped 24.97 points, or 1.67%.

Brazilian stocks were little changed, as investors took some profits following yesterday’s strong gains amid expectations for solid economic growth and a further decline in interest rates next year.

At its last meeting in December, Brazil’s central bank reduced the reference Selic interest rate by half a point to 18% annually. Minutes released today from the meeting showed that the bank believed that the gradual easing of monetary policy would help economic growth while at the same time maintaining low inflation.

"The gradual easing of monetary policy will not compromise the important gains made in the combat of inflation and in the preservation of economic growth with job creation and increase in real income," the policy committee said.

Meanwhile, the National Monetary Council said Brazil will cut its long-term interest rate, known as the TJLP (Taxa de Juros de Longo Prazo), to 9% annually from 9.75% annually for the first quarter of 2006.

The TJLP is used to determine interest rates on government subsidized loans to industry through the National Bank for Economic and Social Development.

According to Brazilian Treasury Secretary Joaquim Levy, the rate cut is due in part to tame inflation and lower debt spreads.

In a sign that Brazil’s inflation remains under control, the Brazilian Census Bureau reported that inflation as measured in the IPCA-15 slowed to 0.38% in the November 15 to December 13 period, from 0.78% in the October 12 to November 14 period.

On the corporate front, Arcelor Brasil said it purchased stakes in two Costa Rican steelmakers in its first move into Central America. "This is a strategic move to have a presence in the region," Arcelor said.

In other deals, Petrobras said it has inked three agreements to buy the fuel businesses of Royal Dutch Shell PLC in Colombia, as well as all of Shell’s operations in Paraguay and Uruguay, for around US$ 140 million.

Meanwhile, budget airline Gol said it will start offering daily flights to Uruguay’s capital Montevideo beginning in January.

In research, a major investment bank raised its price target for grocer Companhia Brasileira de Distribuição to US$ 37.97 from US$ 33.11.

Elsewhere, Mexican stocks dipped, as investors reacted to disappointing inflation data. The Bank of Mexico said today that the Consumer Price Index rose 0.42% in the first half of December, outpacing expectations for an increase of 0.32%.

The reading was also well above year-earlier growth of 0.15%. As such, the annual rate climbed to 3.08%, slightly above the central bank’s target of 3%, after falling below that level for the first time ever in November.

Argentine issues posted solid gains on continued bargain hunting following recent losses on concerns about a reduction in foreign reserves after the government said last week that it would repay all of its debt to the International Monetary Fund. Some upbeat economic data lent additional support to shares today.

Industrial production rose 8.9% in November from a year earlier and 0.4% from October. Those figures were unchanged from preliminary results released last week. Also, Argentina posted a bigger-than-expected primary surplus of 1.57 billion pesos in November, and the current account surplus expanded to US $2.105 billion in the third quarter.

Giving shares of export-oriented companies a boost, President Nestor Kirchner told a group of industrial business leaders yesterday that the peso would trade between 3.00 and 3.05 pesos to the dollar in 2006, weaker than the exchange rate pegged in the government’s budget proposal for next year.

Thomson Financial Corporate Group – www.thomsonfinancial.com

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