Brazilian market boosted after Brazilian Central Bank leaves rates unchanged

Brazilian Equity Market 2013-03-07Enlarge Graph

EWZ jumped over $2 after the Brazilian Central Bank (BCB) announced that the Selic1 rate would remain unchanged at 7.25%. The Selic rate is analogous to the Fed rate in the U.S., which is the target overnight rate at which banks borrow from each other. In Brazil, the BCB’s Monetary Policy Committee (known as Copom) meets eight times a year to decide the level of the Selic rate.

High inflation during December and January had investors and economists betting on an increase in rates to curve inflation. The Copom aims to keep inflation (as measured by the IPCA consumer inflation index) below 6.5%; readings in recent months have continually crept towards that limit. The last IPCA reading reached 6.15% for January.

Brazilian Inflation Target Effectiveness 2013-03-07Enlarge Graph

The government, though, had resisted rate hikes over the past two Copom meetings despite rising inflation to avoid putting out the small spark of growth the economy was experiencing. Last September the government went as far as putting forward a program to reduce electric tariffs by as much as 20-30%, funded partially by government subsidies and partially by utilities, who would receive early renewal of concessions for up to 30 years.

The unchanged rates show that the BCB feels confident that inflation is under control and that Brazil’s economy is poised for growth. This is positive in the short to medium term for investors in Brazilian equities (e.g. EWZ, EWZS, BRF) as well as in Latam equities (e.g. GML, ILF).

  1. Brazilian Central Bank’s reference rate