Brazilian Central Bank to Cut Rates

Highlights include Vivo Participacoes SA (VIV - Snapshot Report), Tim Participacoes SA (TSU - Analyst Report), Ultrapar Participacoes SA (UGP - Analyst Report) and Gafisa SA (GFA - Analyst Report).

Today the Brazilian Central Bank will announce a new cut in domestic interest rates. The global crisis reached Brazil, and according to the last Focus survey (a weekly survey conducted by the Brazilian Central Bank with brokers, banks and consultants), the Brazilian GDP should fall 0.39% in 2009. We believe this outlook is still benign. The IMF expects the Brazilian economy to fall 1.3% this year.

In such a challenging economic environment, it sounds really odd that Brazilian domestic interest rates still are at 11.25% per year. The inflation target for 2009 is 4.5% and, again according to the Focus survey, expected inflation for 2009 is now at 4.3% per year. Forget about soccer -- indeed Brazil is now the world champion of real interest rates!

It seems that there is considerable room for rate cuts in Brazil. For today, we expect a 1% cut, for the end of the year we expect domestic rates to reach 9% per year, the lowest level in Brazil for at least 25 years. It is important to understand that, unlike the U.S., Brazil has a sound and healthy banking system. Thus lower rates will turn into credit expansion sooner or later.

Considering the Brazilian domestic economic environment, we still favor domestic focused companies like Vivo (VIV - Snapshot Report), Tim Participacoes (TSU - Analyst Report), Grupo Ultra (UGP - Analyst Report) and Gafisa (GFA - Analyst Report).