Thursday, December 11, 2008

Brazil, Peru holds rates steady

As expected the Central Bank of Brazil held rates steady at 13.75%. They did however signal that they are prepared to act, possible as soon as the next meeting, to cut interest rates if it is deemed necessary. The "majority" of policy makers "discussed the possibility" of lowering rates but the vote was unanimous to keep them steady. As I have written about before, President Lula, has stepped up verbal pressure for lower rates. Some might view this "Discussion" as trying to appease the President, but I see it more as a good sign that the CB see a problem and are preparing to deal with it. According to BLOOMBERG NEWS Brazil has the highest real interest rates after inflation among 54 countries that they track. This clearly signals that inflation was and is a large concern, but between now and the next meeting on Jan 21 2009 I would expect alot more negative economic numbers to come out and with it pressure to cut rates. The problem for Brazil is that Inflation is running slightly high while their currency has weakened almost 32% since September. This being the second worst preforming currency of the year (behind only Iceland). To cut rates right now would only hurt this two situations, something the CB is not prepared to do. I still expect for rates to open lower tomorrow morning and the currency to be slightly stronger.

Peru also held rates steady at 6.5% which are seven year highs. The Government is hoping that these high interest rates will slow down inflation in the country. Like Brazil, the Peruvian CB openly talked of lower rates at their next meeting. The bank did however cut reserve requirements which frees up liquidity, something credit markets globally really need. It would not surprise me if Brazil took this step also. The problem seen in Peru, slowing growth, high inflation and a weak currency is a similar story throughout Latin America. These countries need to balance out all concerns. I think however it is important to see what has happened here in the States and the velocity at which it has happened. To lean toward lower rates and risk higher inflation seems the more prudent way to go right now.

Good Luck and Good Currency Trading.



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