Brazil Cuts Interest Rates – Will the Real Weaken?

Source: CNN Money

Brazil is one of the world’s hottest economies. But even it is feeling a need to cut interest rates in response to a slowdown in the developed world.

Despite the fact that inflation is still a major concern in the land of Carnival, Brazil’s central bank cut its benchmark Selic rate late Wednesday by half a percentage point.

Rates in Brazil are still a whopping 11.5%, a reflection of the strength of the oil-rich Brazilian economy. But the latest cut comes on the heels of another half-point cut back on August 31. And here’s what is most telling. The decision to lower rates was unanimous.

Brazil’s Comitê de Política Monetária, or Copom, said in a statement that the move was necessary to promptly mitigate “the effects stemming from a more restrictive global environment.”

That’s a big change from less than two months ago. The rate cut in August was met with some resistance. Two of the seven Copom members voted against lowering rates. (Richard Fisher and Charles Plosser apparently have friends in Brasilia. How do you say inflation hawk in Portuguese?)

The Greek debt crisis has only gotten worse in the past few months, leading to more calls for quick action in Europe to prevent contagion. And the economic data in the United States, while maybe not hinting at another downturn, is hardly encouraging either.

With that in mind, it makes sense for Brazil to cut rates.

Yes, it has to worry about inflation at home. But it would be foolish to ignore the problems facing some of its key trading partners.

“It is very important to the Brazilian economy that the U.S. and Europe do not slip into another recession,” said Otavio Aidar, an economist for Mirae Asset Global Investments in Sao Paulo, Brazil.

Can the BRIC nations save Europe?Br

However, more rate cuts in Brazil could also help to weaken its currency, the real. That could lead to increased exports from Brazil and more foreign investment there. So it’s not as if Brazil is altruistically lowering rates as a way of doing a solid for the U.S. and Europe.

That leads us to China.

The People’s Bank of China (PBOC) has hiked interest rates five times since last October. The most recent increase was in July. Some experts fear that China has a real estate bubble brewing that’s just like the one that spectacularly popped in the United States.

But China may finally be done raising rates. That’s because its economy is starting to lose some steam too.

Sure, China’s gross domestic product is still the envy of the planet, rising at an annualized rate of 9.1% in the third quarter. Still, that pace is down from 9.5% in the second quarter and 9.7% in the first.

The inflation rate in China remains an incredibly high 6.1%. But the pace of price hikes are also moderating. At the very least, it seems that future rate hikes from China are unlikely anytime soon — even if the possibility of a rate cut is open for debate.