Brazil Seen Cutting Rates 75 Basis Points In October (EWZ, BZF)
Tony Daltorio: Brazil’s central bank may hack 75 basis points from the country’s benchmark interest rate in October to battle perceptions that its economy is slowing.
Traders believe the bank will act dramatically to counter the idea that the debt crisis in Europe will lead to slowing output in South America.
A cut of that size, which would be the largest by a central bank this year, would reduce the Selic rate to 11.25%. In August, the central bank surprised traders by cutting rates by 50 basis points to 12%, following a similar reduction in Turkey.
The yield on interest rate futures has fallen to 11.2o% in advance of the Oct. 19 meeting, showing how traders are expecting the bank to act.
“The market is pricing in the possibility of the situation in Europe worsening,” Paulo Leme, an economist at Goldman Sachs Group Inc., told Bloomberg. “If the situation in Europe is not solved by October, you will have much deeper interest-rate cuts.”
The cuts to rates in Turkey and Brazil run counter to monetary policy orthodoxy because the countries have inflation rates of 6.65% and 7.33%, respectively. The Brazilian inflation figure through mid-September exceeded the upper end of the government’s target range for the fifth straight month.
Cutting rates — making money cheaper — at a time when prices are already rising runs the risk of boosting consumption, and demand, and leading to even higher prices. Lower rates can also cut demand for the nation’s currency, by reducing the returns for investments priced in reals.
Brazil last cut rates by a larger amount in June 2009 during the depths of the economic crisis when it cut by 100 basis points, or a full percentage point.
The iShares MSCI Brazil Index ETF (NYSE:EWZ) is down about 30% for the year to date, while the WisdomTree Dreyfus Brazilian Real ETF (NYSE:BZF) is off about 5%.
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