Brazil to break the trend

After 18 consecutive rate cuts, the Brazilian Central Bank may interrupt this downward trend by deciding to hold rates at its meeting beginning on Tuesday.  

The Selic benchmark rate, which peaked at 19.75% in September 2005, has fallen to 11.25% at present, although, with inflation expected to come in below the 4.5% target for 2007, this remains one of the highest real interest rates in the world.  It has been widely blamed for curtailing GDP growth, which reached only an anaemic 3.7% last year -- well below the performance of most other major South American and emerging markets -- and for helping to strengthen the currency to a high of 1.80 reais to the dollar in early October, affecting the competitiveness of non-commodities exports.

However, another 25 basis-point cut looks unlikely.  Industrial output figures for August were better than expected, up 6.6% year-on-year, and further rate cuts could stoke more rapid growth and inflationary pressures.  Inflation expectations have risen slightly in recent weeks, according to several surveys of economists, and the September General Price Index (60% of which is made up of wholesale prices) was up 1.17% month-on-month -- although the consumer price index slowed to 0.18%, well below expectations, putting annual consumer price inflation at 4.15%.  With the government now anticipating growth of 4.5% this year, under-investment in the economy and many sectors running close to capacity, rapid rate cuts could still risk spurring inflation.