Wednesday, April 18, 2012

Brazil Cuts Rates Again

Brazil's central bank slashed interest rates yet again making the sixth rate cut in under a year. Rates were lowered a dramatic 75 basis points making the rate 9%. Yes, that is correct. The rate in Brazil still remains one of the highest rates in the world even after 350 basis points in cuts since August. The rate peaked at 12.5%

The reason for the cut was an anemic GDP print in Q4 of only 0.3%. Inflation has also dropped with expectations now at only 4.4% for 2012. This could provide cover for even more cuts this year.

Amazingly, the interest rate could fall below levels last hit in July 2009 of 8.75%. Even possibly lower. Heck, I'm not sure I understand why Brazil has such a insanely high rate. It doesn't have GDP growth faster than China or India so why are interest rates higher?

Anyway, guess that is besides the point.

Eventually these rate cuts should help spur the economy. Stocks in our models such as home builder Gafisa (GFA) and wireless provider NII Holdings (NIHD) should see a huge boost. Both stocks trade near 52 week lows. Investors have fled the stocks in the face of these rate cuts.

Interest rate cuts typically take 9-12 months to impact the US economy. Assuming a similar impact in Brazil, the first rate cut back in August should just now be having an impact. Unfortunately central banks just don't allow the original cuts to flow through the economy before panicking with more rate cuts or increases in boom times.

Brazil rates are so high that it is hard to complain that the central bank has made so many cuts without even allowing the first cut to run its course.

Details from SmartMoney.com:


  • Brazil's central bank slashed its benchmark interest rate to 9% Wednesday, and left the door open for future rate cuts. It was the sixth consecutive cut by the bank's monetary-policy committee, or Copom, lowering the rate from 9.75%.
  • The bank began its latest rate-cutting cycle last August, when it reduced the Selic benchmark rate to 12% from 12.5% amid growing concern by policy makers that the economic slowdown outside the country was hurting growth in Brazil.
  • the economy has resumed growth, with GDP increasing 0.3% in the fourth quarter from the third and leaving the growth rate at 2.7% for 2011, from 7.5% in 2010.
  • The bank in March cut its forecast for the inflation rate for this year to 4.4% from its previous forecast of 4.7%, citing disinflationary pressures from the global economy. 


Disclosure: Long GFA and NIHD. Please review the disclaimer page for more details. 




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