One More Round of Monetary Easing in Brazil

Brazil continues to enjoy remarkable financial sector and currency market stability despite the economic deceleration. According to the latest Focus the country will contract by 0.4% in 2009. However, it is important to pinpoint that the Central Bank of Brazil was very successful in implementing currency swaps to reduce the volatility of the currency. The BRL seems to be immersed in a very solid stabilization trend with a slight bias towards further strengthening.

Yesterday the Central Bank of Brazil lowered the Selic to a record low of 10.25% from 11.25%, the lowest interest rates since 2003. Indeed, the achievement of a single digit interest rates is unique under a regime of flexible exchange rate and inflation targeting. It may be the case that Brazil will keep implementing this monetary easing in a pace similar to Mexico in 1997. The monetary easing in Mexico enabled the country to avoid preserving high interest rates through a successive rate cuts. Back then, due to the negative external conditions countries like Mexico had to soften its monetary policy instances. In our view, Brazil has more room to keep implementing more interest rates and finish 2009 with the Selic at 9.75%.