Brazil Cuts Interest Rates for First Time in 16 Months

By Mike Caggeso
Associate Editor
Money Morning

Brazil's central bank today (Wednesday) cut its benchmark interest rate from 13.75% to 12.75%, its first rate cut in 16 months and a move to guard the country's economy from the global financial crisis.

In the past year, it rained pretty hard on Brazil's burgeoning economy. Its Bovespa stock index is been halved since hitting a record high in May. During that fall, Brazil's currency, the real, tumbled more than one-third from its nine-year high.

In the fourth quarter, commodity prices and consumer demand continued falling, leading to a loss of 654,946 government-registered jobs in December - the worse monthly loss since the government began tracking jobs data in 1999.

With the interest rate cut - a moved allowed by falling inflation - the central bank hopes the $1.9 trillion economy can keep pace with President Lula's 2% economic growth target for 2009, a small figure compared to the 6.8% expansion registered by the Brazilian economy in the third quarter of 2008, Bloomberg reported.

Inflation cooled to 5.9% in December, falling within the bank's target of 2.5% to 6.5%.

"We have a good macroeconomic situation to cut interest rates," Alexandre Lintz, chief economist at Banco BNP Paribas Brasil SA, told Bloomberg.

Brazil Outlook

In the next three years, China, alone will invest as much as $725 billion in infrastructure, while Brazil will invest $225 billion with very similar goals:

  • Strengthen fiscal stimulus, allowing a drop in the value of the real currency (a decline that's already been substantial) in order to cushion exports.
  • Easing capital requirements to Brazil's strong banking system, which will spur housing and car loans.
  • Export financing.
  • Begin huge local infrastructure projects.

There is another little-understood phenomenon that cushions the blows for emerging economies: Intra-emerging market trade has become increasingly important.  By now everybody understands that iron ore from Brazil and coal and oil from other emerging markets is flowing into China in order to fuel China's massive infrastructure buildup and growing consumer demand.

Money Morning Contributing Editor and emerging market specialist, Horaocio Marquez feels Brazil will pull itself through the financial crisis because historically and presently, the Central Bank of Brazil and the Brazilian government have acted very quickly to backstop the liquidity effects against their banks

Both are run by a superb team of experienced managers, especially adept at controlling the till in rough economic waters, Marquez said.

"The policies, run day to day by a sophisticated technocracy led by top economists and international bankers, many of which held top positions in leading international banks, have allowed Brazil to move forward," Marquez said. "Hence, Brazil is by far my favorite Latin American play for 2009."

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