Brazilian Central Bank Cuts Rate By 100 Bps

Last night, the Brazilian Central Bank announced an amazing decision when it decided to cut domestic rates by 100 basis points to 9.25% per year.

Until just several days ago the market was expecting a cut of 75 basis points. However, after the release of the better-than-expected GDP numbers a few days ago the market changed its expectation to just 50 basis points.

Considering the orthodox bias of the Brazilian Central Bank, we were expecting a 50 basis points cut, too. The decision was not unanimous — among the eight directors with powers to vote in the meeting, six directors voted for 100 basis points cut and two voted for 75 basis points.

Despite the bold decision, the statement after the meeting said that any additional cuts in the near future will be implemented in a more “parsimonious way,” thus new cuts should be much less aggressive.

This is the first time in more than 30 years that Brazil has reached a single-digit interest rate.

Despite this aggressive move, we maintain our expectation for year-end interest rate in Brazil between 8.5% and 9%. After this remarkable decision, we reinforce our positive view on companies focused on the Brazilian domestic market, including TAM (TAM), Vivo (VIV), Cemig (CIG) and Copel (ELP).

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