Inflation pauses in Brazil and so does the central bank; look for that to keep Brazil's economy cooking

09/09/2010 3:00 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com



Inflation is falling in Brazil. Through for the 30-day period through mid-August consumer inflation was just 4.44%. That’s the first time since January that inflation has been below the government’ target of 4.5%.

Now the question is How long will the improvement last? Your answer to the question depends on your view on the strength of the global economy.

Many economists and financial analysts see the improvement in inflation as a temporary result of a slowing in the global economy. Inflation will pick up again, they believe, as soon as the slow down in global economic growth caused by the euro crisis passes. This camp expects the central bank to raise interest rates to 12% sometime after July 2011. Forecasts for next year call for inflation to rise to 4.87%. That’s a slight increase from the consensus forecast of 4.8% four weeks ago.

A minority of economists and analysts, who believe that the global economy will continue to weaken into 2011, are expecting that the bank will actually have to cut interest rates in 2011 in order to balance weakness in the Brazilian economy.

Brazil’s central bank, Banco Central do Brasil, is keeping its options open.The bank left its benchmark Selic interest rate on hold at its meeting yesterday, September 1, at 10.75%. That comes after interest rate increases at the central bank’s last three meetings.

But that doesn’t mean the bank believes that interest rates won’t have to go up to battle resurgent inflation sometime in the next 12 months. Although the bank said in its post-meeting statement that inflationary risks continue to fall, it also noted that the current interest rate is adequate to fight inflation “at the moment.”

In the near term, the bank’s decision not to raise interest rates means that the rush of Brazil’s big companies to raise cash in the financial markets will continue. Get the money now just in case rates are headed up in 2011 seems to be the corporate mantra.

That’s giving Brazilian companies plenty of cash to invest and is fueling a boom in acquisitions by Brazil’s companies. Recent news that a investment group backed by Brazilian money, 3G Capital, will acquire Burger King Holdings (BKC) for $3.2 billion is just one more sign of that trend.

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