Wednesday, 21 January 2009

They Are Aggressive: 100 Basis-Point Rate Cut in Brazil ...

Jesus! The Copom did it. The Committee trimmed the overnight rate by a full percentage point to 12.75 percent. Interpretation: WE ARE IN A RECESSION, AND A BAD ONE ... We expected here in MM a reduction in the Selic to 13 percent.

This is the text in Portuguese, and then my translation follows:

''Avaliando as perspectivas para a inflação, o Copom decidiu, neste momento, reduzir a taxa Selic para 12,75% a.a., sem viés, por cinco votos a favor e três votos pela redução da taxa Selic em 0,75 p.b. Com isso, o Comitê inicia um processo de flexibilização da política monetária realizando de imediato parte relevante do movimento da taxa básica de juros, sem prejuízo para o cumprimento da meta para a inflação.´´

''Evaluating the prospects for inflation, the Copom decided, in this moment, reduce the Selic rate to 12.75 percent, with no bias, in a five-to-three vote, with three ballots going for a 0.75 percentage point reduction. With this, the Committee initiates a process of monetary policy easing carrying out immediately the relevant portion of monetary policy actions related to the changes in borrowing costs, without putting at jeopardy the fulfillment of the inflation target.´´

My reading of this is:
1) The dissent were the conservative voices that for the Lula years managed monetary policy decisions (including CB President Henrique Meirelles.) This is the first time the hawks were defeated -- I don't recall such a voting result during the Lula years.
2) There must be some serious and intense political pressure going on. Why the Copom doesn't mention the magic words ''economic activity´´ in its statement will remain a mystery until next week, when it releases its policy minutes. The decision is clearly aimed at stimulating the economy -- but the guys at the Copom only do talk about INFLATION!
3) Equity markets will jump tomorrow. Many strategists at several shops (Bulltick among them) were confident of this ... although neither of them sounded tooooo convinced.
4) The beginning of the monetary easing cycle will be asymmetrical -- that is, the hawks will try to slow the speed, while the doves will try to accelerate it. Meirelles will probably remain mum for a while, and only limit his talking to dull conferences.
5) The Finance Ministry is the clear winner of this tug-of-war. Mantega (Mr. Criswell) will now have more clout to increase spending until he sees some recovery signs sparking. Poor him -- he won't see any of that, at least until 2010!
6) The CB will have freedom (uhhm, sorry, will be forced) to extend aid to ailing companies by offering either a decrease in reserve requirements or more dollars to help them roll over maturing debt.
7) And what about banks? Mantega will try to force them to lend at any cost. Meirelles must be fuming after this ...

Now, wait a minute! what about if the bank board members decided to negotiate this dissent signs, to show the markets they still care about inflation? Nahhh, please, this is no time for conspiracy theories.

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