Friday, May 18, 2007

Brazilian Central Bank to Decrease Interest Rates by 500 Basis Point in June

According to Folha de Sao Paulo the Brazilian Central Bank told president Lula that the Copom will decrease interest rates in 0.5% in their next meeting (June 6). The easing in interest rates intends to reduce the attractiveness of Brazil to foreign investors. The fact that Brazil has opened up its capital account and preserved high interest rates (currently at 12.5%aa) has attracted immense capital inflows to profit from the interest rates differentials. The Central Bank purchases of dollars (and its sterilization) proved insufficient to avoid a further weakened in the Real (now at 1.95 reais per dollar). There is room for further decreases in interest rates, without threatening the current inflation target regime. It remains to be seen whether decreases in domestic interest rates will significantly decrease the massive capital inflows in Brazil.

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