Brazil cuts interest rate by half a point

Brazil’s central bank cut its core interest rate by half a point on Wednesday evening to 8.75 per cent a year amid further signs that investors expect the country to recover more quickly than expected from the global economic crisis.

Brazilian stocks have gained about 33 per cent this year and are back to their level before the collapse of Lehman Brothers last September. The currency, trading on Wednesday at about R$1.90 to the US dollar, has almost recovered its losses since then.

“The central bank is taking the opportunity to anchor rates at historically low levels,” said Paul Biszko, senior strategist at RBC Capital Markets in Toronto. He said deflationary forces around the world, especially the fall in commodity prices over the past six to nine months, had created opportunities for central banks in several countries to bring interest rates down.

Most market economists expected the bank to make a half-point cut on Wednesday evening, after making a cut of one and a half points in March and two full point cuts since then. The bank said the new level was “consistent with a benign outlook for inflation”, suggesting it may wait to see the results of monetary loosening undertaken this year before deciding its next move.

“What we’ve seen not only in Brazil is that central banks have been really careful not to disappoint market expectations in their decisions,” Mr Biszko said. “Markets have continued to reward central banks taking a more aggressive line to stimulate their economies.”

The central bank’s target overnight rate, or Selic, rose from 11.25 to 13.75 per cent in the year to last September, as the bank showed its concern over stubbornly high inflation even as the global crisis began to take effect. But it began reducing the Selic in January and the rate is now at its lowest level ever.

According to EPFR, an emerging market fund tracker, investors put $26.5bn into emerging market funds during the second quarter of this year, the biggest figure ever. “From talking to clients, the evidence is that Brazil is the number one favourite destination,” Mr Biszko said.