Aggressive Brazilian Rate Cut

Telesp (TSP - Snapshot Report), Cemig (CIG - Analyst Report), Copel (ELP - Analyst Report), Oi Participacoes (TNE - Analyst Report) and  Telemig (TMB).

Yesterday afternoon, the Brazilian Central Bank decided to cut domestic rates by 150 bps to 11.25%, the biggest cut since November 2003. As we said yesterday morning, we were expecting 125 bps.

Usually, we tend to bet on the conservative side when it is about a Brazilian Central Bank decision. The main reason for this is that the Brazilian Central bank is very orthodox and averse to dramatic moves.

We continue to believe that this is just the second cut of a longer trend of cuts and we expect Brazilian rates to reach 9.5% by the year end. The reason for this still high rate is that inflation in Brazil is not dead as in the U.S. or Europe, while developed economies are fighting against deflation; Brazilian inflation is expected to reach 4.5% in 2009.

Brazilian economy is still indexed, telecom and electric tariffs, among others, are still adjusted by past inflation in the following year, thus inflation is quite resilient and takes more time to fall.  Moreover, the recent decline in the Brazilian GDP was driven by lower investments; private consumption declined just 2% in the fourth quarter 2008.

Considering the expect tariff adjustment for the electric and telecom utilities, which usually pays high dividends,  and the declining  interest rates, We continue to recommend Telesp (TSP - Snapshot Report), Cemig (CIG - Analyst Report), Copel (ELP - Analyst Report), Oi Participacoes (TNE - Analyst Report) and  Telemig (TMB).