Brazil Market

Brazil rates: moment of truth

It’s the million-dollar question in Brazil right now. Is the recent reduction in interest rates sustainable? If it is, then the past 14 months or so could go down in history as the turning point not only for the country’s capital markets but for anyone doing business in Brazil. After decades of being lumbered with some of the highest interest rates in the world, Brazilians will finally be able to take out loans and mortgages at decent rates. The stock market should see a revival, companies will have more options for funding, longer-term investment will be encouraged, and there should be less pressure on the currency from foreign inflows into bonds.

All that, however, depends on one thing: inflation.

In many ways, Brazil has done the easy bit by reducing the benchmark Selic rate by 525 basis points to a record-low of 7.25 per cent since August last year. Turmoil in global markets and a sharp economic slowdown at home have kept inflation comfortably below the 6.5 per cent ceiling of the central bank’s target range. But now that the easing cycle is coming to an end and Brazil’s economy is beginning to pick up speed again, we are nearing the moment of truth. Will the authorities be able to keep a lid on inflation without resorting to big interest rate hikes?

Inflation data on Wednesday did not look like a good start. Brazil’s benchmark IPCA consumer price index rose 0.59 per cent in October – its fastest pace since April but in line with analysts’ forecasts. However, the good news was that most of that was due to higher food prices, which are expected to ease as US agricultural production recovers from this year’s severe drought.

Nevertheless, Brazil is facing a nail-biting few months ahead.