Brazil's recent rate cuts are unprecedented, historically speaking. The country is known for its high inflation and high-interest rates. And now, as the U.S. and Europe look to raise rates, Brazil is going the other way. And this is expected to lend a hand to an economy that's been down in the dumps for over two years.
Brazil cut interest rates to 7% on Wednesday. The market expects it to go even lower. Joao Ribeiro, a Brazil economist with Nomura Securities, expects it to hit 6.75% and hold steady for much of next year.
This is the 10th consecutive rate cut in a cycle that started at 14.25% in Oct 2016, bringing the benchmark interest rate to where it is today. The post-meeting statement by the central bank also said there could be more to come and an additional 25 basis point cut is likely by February.
The cuts are bullish for Brazilian equities. The market sold on the news today, with the main Brazil ETF — the iShares MSCI Brazil (EWZ) — falling nearly 3%.
London-based asset manager Schroders says Brazil is an overweight for equities.
See: Market Will Not Be Pleased If Lula Becomes Brazil's President Again -- Forbes
Other big investment houses said today in private notes to clients that Brazil is on the mend and a faster pace of growth is expected. That would put the central bank on hold after the next rate-cut meeting in December. Bond investors should not bet on much more than a 25 basis points cut next year, especially if Brazil's economy starts growing over 2% as recent consensus forecast surveys by the central bank suggest.
Brazil has faced its worst economic recession since the late 1990s and early 2000s when it faced both a currency and debt crisis at the same time. This current crisis is largely due to Brazil's political crisis. Oil firm Petrobras was caught colluding with the private sector and elected officials to rig public works contracts for personal gain and political favors. Numerous senior-level executives have gone to jail as a result of the investigation in the Petrobras graft scheme. The current president's approval level is in the gutter, currently hovering at around 5%.
