Will Brazil’s Latest Interest Rate Hike Be Its Last? (EWZ, BAK)
As widely expected, Brazilian central bankers yesterday raised short-term domestic borrowing rates another quarter percentage point. But their next move is now anybody’s guess.
The Copom monetary policy board surprised the markets by trimming their statement to one line.
In particular, they removed a long-standing warning that more rate hikes could be needed to keep inflation in check.
This led traders to suspect that Brazil could pause for at least a month or two to see whether five interest rate hikes — taking the benchmark all the way to 12.50% — would be enough to slow inflation.
Consumer prices in Brazil are indeed slowing, but the headline inflation rate of 6.75% is still too high for Copom’s comfort.
While this move does give Copom flexibility to raise rates again, some economists worry that political expediency is trumping economic necessity.
President Dilma Rousseff has sworn to cut interest rates in Brazil during her term and Copom’s chief, Alexandre Tombini, is one of her appointments.
In any event, even the hope of an end to the tightening cycle may give shares of heavily indebted Brazilian companies a lift. Rising interest rates have made it more expensive for corporations to borrow, pushing broad portfolios like iShares MSCI Brazil Index ETF (NYSE:EWZ) downward:
Plastic manufacturer Braskem (NYSE:BAK) just issued $500 million worth of bonds, and other deals are likely waiting in the wings.
Written By Tim Seymour From Emerging Money
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.
About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.
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