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Key Interest Rate Cut in Brazil Leads to Higher GDP Forecast

Brazil's real has been strong vis à vis the dollar

Brazil's real has been strong vis À  vis the dollar Brazil's Central Bank on Wednesday, June 6,  shaved 50 points of the Selic reference interest rate, which now stands at 12%, a historic low and in line with market expectations. The Monetary Policy Committee, Copom, admitted in a release that it was a divided decision with five board members supporting the 50 points cut and two favoring a more modest 25 points.

This was the sixteenth consecutive time the Selic basic rate is cut since Brazil's Central Bank begun in September 2005 to distend the strict monetary policy. Besides this latest 50 points reduction also signals a new approach since until now all cuts were in the range of 25 points.

According to a brief release from the bank, the decision was adopted following an assessment of the macroeconomic scenario and inflation prospects. Copom is scheduled to meet again July 17/18.

Actually inflation in the last quarter was below the bank's target helped by a strong appreciation of the local currency, which favors imports.

In recent statements Central Bank chairman Henrique Meirelles admitted that interest rates in Brazil still were "too high" but also recalled that when he took office in 2003, inflation was in the range of 20% annually and has now dropped to 3%.

"Brazil has suffered a long period of bad surprises concerning inflation. This is one of the reasons why interest rates, somehow, are still too high," said Meirelles.

Brazil's Central Bank is under strong pressure from local industry, retailing and certain political groups that are insistently lobbying for lower interest rates.

However Meirelles anticipated that as the Brazilian economy picks up speed, rates will continue to drop. The IMF growth estimate for Brazil this year is 4.4%, but analysts are reviewing the figure upwards. The central bank is working on an estimate of 4.1%, which is higher that the 3.8% of last December.

"Fundamentals are there, GDP growth is reacting positively as a direct consequence of greater consumption confidence, stability and investment," said Meirelles.



  • Show Comments (8)

  • AES


  • AES

    The International Monetary Fund expects the Brazilian economy to grow 4.4% this year.

    Lately there is another benefit for foreign investors: the strengthening of the Brazilian real. Since the start of the year, the real has gained 9% against the dollar. That increase boosts returns for foreign investors, because every Brazilian real earned can then buy more dollars. It is also good news for some Brazilian companies, such as airlines GOL and TAM, because their main cost, fuel, is denominated in dollars, making it cheaper for them in local-currency terms.

    Foreigners are also keen on Brazilian bonds. “It’s one of our largest holdings,” says Michael Gomez, co-head of emerging markets at bond giant Pacific Investment Management Co. Last month, Standard & Poor’s elevated Brazil’s foreign-currency bonds to one step away from investment grade, a benchmark Mr. Gomez says he expects Brazil to reach in the next year.

    The International Monetary Fund expects the Brazilian economy to grow 4.4% this year.

  • AES

    “Things are really looking good. Inflation is stable, the currency is strong”
    Brazil’s Bull Draws Fans
    Market Wins Over Skeptics
    With Newfound Stability
    By ANTONIO REGALADO in SÀƒ£o Paulo, Brazil, and JOANNA SLATER in New York

    Economist Robert Shiller explained the 2000 stock-market slide (before it happened). He also gave an early warning about a retreat in U.S. home prices.

    But there is one hot market he still likes: Brazil.

    This year has seen mixed performances in the stock markets of several emerging giants. China looks increasingly like a speculator’s game, India’s returns have been lukewarm, and Russia’s benchmark index has lost ground.

    Meantime, SÀƒ£o Paulo’s Bovespa index has climbed 17% this year — and gained 350% since 2003. Brazilian markets were closed yesterday for the Corpus Christi holiday.

    Brazil’s economy has long been one of booms and busts. But the country recently has made big strides to distance itself from its past. The government has reduced its foreign debt and built up dollar reserves. Exports have surged.

    Brazil has tamed inflation and, unlike many nations, is cutting interest rates. On Wednesday, the central bank lowered interest rates by half a percentage point to 12%, the 16th rate reduction in the past 21 months.

    Brazilian stocks are doing so well that Mr. Shiller, a Yale University economist whose 2000 book “Irrational Exuberance” laid out a theory of how speculative market bubbles happen, recently took a closer look. His conclusion: The enthusiasm seems to be merited.

    “Things are really looking good. Inflation is stable, the currency is strong”

  • AES


    How quickly perceptions of Brazil and its ethanol have changed. A few years ago, it looked pretty peripheral, even parochial, from an international point of view. Today, it’s taken very seriously, and Brazil could well end up a significant oil exporter– except it won’t only be oil from its offshore oil wells, but also ethanol from sugar farms. This will add to the diversification of the global fuels market. The second is that in years past, Brazil was not an important country from an energy point of view. Today, it is at the forefront in deep water drilling — it has added half a million barrels of capacity since the beginning of this decade. And it is at the forefront of ethanol. They expected 500 people at the conference. More than 1200 showed up. And an awful lot of them were not from Brazil!

  • João da Silva

    [quote]hope pur planners [/quote]

    Sory,It should read “OUR planners”

  • João da Silva

    [quote]http://youtube.com/watch?v=-VRfySkvOJo [/quote]

    Thanks,my friend ,for posting it. I am sending this to some of my friends and hope pur planners have an opportunity to see this. REST,how true it is.

  • swiss pride

    humm let me see if I can find the reazon…
    ” and what are the other reasons…if they exist ? ” Said CH.C .

    hummmmm I don’t know … maybe because he has a PHD in Economics and You are just an ignorant clueless ASSHOLE ??? 😉

  • ch.c.

    This is one of the reasons why interest rates, somehow, are still too high,” said Meirelles. !!!!!!
    and what are the other reasons…if they exist ?

    – Brazil still has the World highest interest rates….after inflation, despite 16 rates cuts ! More strange, there is not !
    – Argentina, a country with a much lower rating than Brazil, has just issued their first fixed rate local bond.
    At 11,7 %. Inflation is running at 8,8 %. Therefore they are paying 3 % above inflation !
    – Brazil is paying nearly 9 % above inflation !

    Great isnt it ….for investors and speculators ? But not so for you the society.
    Yessssss….your government is borrowing on YOUR behalf.

    It is Your Money that your government is dilapidating at an excess rate of 6 % !


    Funny that you applaude your government, when in reality they are taking you for a ride !

    But…but….but….THEY KNOW HOW IDIOTS YOU ARE, they expect nothing else from you !

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