Another Cut in Brazil’s Interest Rate

After cutting interest rates four times since the beginning of 2009, Brazilian Central Bank yesterday again slashed interest rates by 50 basis points to reach 8.75%. There is room for further cuts in the very short-term. We expect that the Brazilian domestic rates will reach somewhere around 8% by the end of 2009. 

The reduction could act as a boon to the Brazilian economy because the continued decrease of the domestic rates will help counterbalance the effects of the international crisis in the short-term, considering that Brazil has a healthy and stable banking system. Thus, additional rate cuts will translate into more credit availability sooner or later. Additionally, the country has huge international reserves over US$200 billion, a positive trade balance, slightly negative current account balance, and reasonably solid fiscal situation. Brazil is being affected by the crisis for sure. However, we expect Brazil to outperform more developed economies in Europe, Japan and the U.S. Brazil’s gross domestic product (GDP) rose 2.2% sequentially in the second quarter 2009. 

The rate cut will help Brazil based companies to grow in the medium term. Thus, Telecom Participações S.A. (BRP - Analyst Report),fixed-line telecom service providers in Brazil, Companhia Brasileira de Distribuicao (CBD - Analyst Report), which operates supermarkets under the names Pão de Açúcar and Barateiro, hypermarkets under the name Extra, and home appliance stores under Extra Eletro, Companhia Energetica de Minas Gerais (CIG - Analyst Report), Companhia Paranaense de Energia (ELP - Analyst Report), integrated electric utilities in Brazil, CPFL Energia (CPL - Analyst Report) , largest private company in Brazil’s electricity sector, Gafisa (GFA - Analyst Report), one of the largest builders and incorporators of Brazil, Gerdau S.A. (GGB - Analyst Report), leading steel producer in Brazil, Gol Linhas Aereas (GOL - Analyst Report), and Tam (TAM - Analyst Report) will stand to benefit.