There appears to be a lack of consensus within the Brazilian government about where interest rates should be headed.
Hope for a massive rate cut on the horizon has helped Brazilian stocks avoid the worst of the losses in global markets over the last week:
But while President Dilma Rousseff has lobbied for rates to go a lot lower, her hand-picked central bank chief, Alexandre Tombini, may be too wary of inflation to make it happen.
Local papers still quote anonymous sources inside the Rousseff government who say that they want the benchmark Selic rate to fall a full 3 percentage points to a target of 9% by the end of next year.
But other anonymous sources say a more moderate series of policy moves is more likely, provided that the euro crisis doesn’t not turn out to be as severe as the 2008 credit crunch.
For her part, Rousseff still sees any slowdown in global economic activity as an opportunity to guide interest rates lower. If inflation becomes an issue, she hopes to use alternative policy tools to fight it.
Given Brazil’s long track record, any attempt to slash local rates risks touching off inflation, no matter how poorly the global growth environment is faring.
On the other side of the coin, unless we get clarity before the Brazilian central bank’s next policy meeting on Oct. 19, traders will remain a little confused.
Confusion is generally not a good thing for markets that are already unsettled. Look to see support for Brazilian funds like EWZ (quote) erode.
However, a more measured policy could keep the Brazilian real (re-AL) and real funds like BZF (quote) afloat.