Central bankers in Brazil reduced the cost of borrowing in reais by 50 basis points today, their fourth rate cut in a row in order to stimulate the local economy and ensure that Europe’s currency crisis does not spread to Latin America.
Today’s cut brings the benchmark SELIC rate to 10.5%. President Alexandre Tombini and his colleagues called it a “moderate adjustment” in order to keep Brazil insulated from economic dislocations overseas.
With the central bank expressing confidence that the current rate-loosening cycle will still allow them to reduce Brazilian inflation to 4.5% over the course of 2012, traders now expect rates to fall another percentage point by the end of the year.
Still, inflation remains a concern for many market participants. And while Brazilian interest rates — adjusted for inflation — are still the highest in the emerging or developed world, the local real currency (BZF, quote) is still 13% weaker than it was in July.
Lower interest rates will only exacerbate flight of capital from Brazil, creating fresh pressure on the still-fragile real.
In the meantime, Brazilian stocks rejoiced at the news. The large-cap EWZ (quote) fund jumped 2.87% while the small-cap BRF (quote) edged up a full 2%.