• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Here


    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Conclusion: Brazil increases interest rates to 10.25%, which leads the G20. Investors applaud, the masses are less pleased.

From Brazil, we're seeing more proactive risk management from a central bank president not named Glenn Stevens. As widely anticipated, the central bank’s monetary policy committee voted unanimously to raise Brazil’s primary interest rate, the SELIC, by 0.75%, to 10.25%.  The previous rate hike – also 0.75%, from 8.75% to 9.5% - was put through in April.  The rate increase was in line with market expectations in the central bank’s efforts to combat inflation.  The monetary policy committee meets again on 20 July.

Labor unions and business owners have expressed displeasure, saying the bank has thrown a bucket of cold water on the economy at what should have been an auspicious moment.  Sao Paulo’s business federation (Fecomerico) said the rate hike is the bank’s way of compensating for the state’s inefficiency.  They said the country should get public spending under control and make investments that will provide productive stimulus, rather than seek to control demand through higher interest rates. Consumers are echoing the more of the same with their wallets. Consumer credit delinquencies rose 1.9% in May Y/Y and 4.3% M/M (the first increase since Oct. 2009). Burgeoning credit card debt, consumer financing and bank loans were seen as the principle cause of the rise in the indicator, as consumer indebtedness grew at an accelerated rate during the last three quarters.  Rising interest rates were also seen as a contributing factor.

While we’d prefer not to take sides here, we do have a soft spot in our hearts for countries that respect the cost of capital – particularly in the face of white-hot growth and above-target inflation. To recap, Brazil posted a China-esque +9% Y/Y 1Q10 GDP release on Tuesday and May inflation (CPI) came in up 5.22%, though down sequentially from 5.26% in April, which is above the target rate of 4.5%.

In short, this seems like a classic case of short-term pain for long term economic gain. While Brazil does indeed have its problems (crime, government wastefulness, dried up capital markets), it certainly deserves a pat on the back for this latest bout of risk management. With the Bovespa rallying 2.6% yesterday, it looks as if it is getting just that.

 Brazil . . . Winning the World Cup of Interest Rates - Bovespa

Moshe Silver

Chief Compliance Officer and Managing Director

Darius Dale