Tony Daltorio: Growing fears of renewed inflation, and uncertainties over the European (NYSE:VGK) debt crisis, are pushing down Brazilian stocks, making them among the worst performers in emerging markets.

Brazil’s Bovespa index has fallen about 27% so far this year, with the iShares MSCI Brazil Index ETF (NYSE:EWZ) down a similar amount.

Brazilian stocks, as measured by current price-to-book ratio, are trading at a discount of more than 20% to their 2008-09 lows, and at 8.5 times to 9 times forward earnings, according to Credit Suisse.

Brazil’s central bank has reversed course and is now cutting interest rates. It recently cut rates by one-half percent to 12% and is expected to lower rates by three-quarter percent in its October 19 meeting.

The moves fly in the face of monetary policy orthodoxy, which dictates that policy makers reduce the money supply — mostly by raising interest rates — when inflation erodes the value of money. Brazil’s inflation is currently about 7.33%, far above the central bank target.

“The central bank has made a big bet that inflation will drop,” said Oliver Leyland of Mirae Asset Management in Sao Paulo.

If the bank is wrong, Brazilian inflation will be well above 7% next year, and Brazil’s stocks will continue to suffer, said Fabio Kanczuk, a partner with Sao-Paulo based Reliance Asset Management.

Written By Tony Daltorio For 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.