Brazil is winning its inflation battle faster than expected

07/22/2010 3:27 pm EST


Jim Jubak

Founder and Editor,


Brazil’s central bank, Banco Central do Brasil, raised its benchmark Selic interest rate by only 0.5 percentage points yesterday to 10.75%. Expectations had been for a 0.75 point increase.

The consensus is that the smaller than expected increase in rates is a signal from the bank that the bank will stop raising interest rates earlier than expected and short of the 12% rate previously forecast.

The surprise is a result of a surprisingly fast drop in Brazil’s inflation rate in response to higher domestic interest rates—and to slower growth in the European economies as a result of the euro debt crisis. In the 30 days that ended in mid-July consumer prices fell to 0.09%. The drop small as it was, was the first drop in inflation in four years.

Investors who have been waiting for an end to Brazil’s round of interest rate increases have, as of 3 p.m. ET, bid Brazil’s Bovespa stock index to its biggest gain in six weeks.

I’d agree that the bank’s 0.5 percentage points rate increase is a signal that the Banco Central intends to end rate increases sooner rather than late. If you’ve been waiting to buy Brazilian bonds until the bank was done, I think it’s now reasonably safe to get into the water. (Buying Brazilian bonds though, isn’t exactly easy, if you aren’t a resident of Brazil. As soon as I figure out how and have some method and agent to recommend I’ll write a new post.)

The signal also removes some risk from Brazilian stocks. I’m not in a rush to buy because Brazil’s stock market is currently closely correlated with China’s stock market and China’s market is still at sixes and sevens over the direction of government monetary policy. A few more weeks could resolve the Chinese quandary. Having waiting this long, I’m willing to wait a little longer.
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