Brazil Central Bank Unexpectedly Cuts Its Overnight Rate To 12.0% From 12.5% Following Observations Of "Substantial Economic Deterioration"

Tyler Durden's picture

In a shocking move, one which is sure to reverberate around the Developing and certainly Developed World, the Brazilian Central Bank just announced that it was cutting its Selic (overnight lending) rate from 12.5% to 12.0%, citing "substantial economic deterioration" - something that not one of the 62 analysts covering Brazil had anticipated. It seems that following over a year of small arms fire FX intervention sniping, Brazil has finally reevaluated its growth prospects, and instead of dealing with the inflow of capital on a piecemeal basis by buying dollars daily - a move which has not worked at all, has decided to cut off flows at the stem. This is most likely the first of many rate cuts by Brazil which is obviously anticipating a major growth contraction in China, and as a result we expect the the other BRICs will very soon reevaluate their stance vis-a-vis being the remaining target of global capital flows. Ironically, up until now it was mostly the developed (read bankrupt) world that was devaluing its currencies... Well, make way for the new kids on the block because this is about to get interesting.

Full translated statement from the BCB

Brasilia - The Committee decided to reduce the Selic rate to 12.00% pa, without bias, by five votes to two votes for the maintenance of the Selic rate at 12.50% pa Rethinking the international scene, the Committee considers that there has been substantial deterioration, reflected, for example, generalized reductions in the magnitude and growth projections for major economic blocs. The Committee believes that increased the chances that the restrictions which are now exposed several mature economies extending over a longer period of time than anticipated. Note that, in these economies, it seems limited scope for using monetary policy and a scenario prevails fiscal restraint. Thus, the Committee considers that the international disinflationary bias manifests relevant horizon. 


For the Minutes, the transmission of external developments in the Brazilian economy can be realized through various channels, among others, reducing the flow of trade, moderating the flow of investment, tighter credit conditions and worsening in consumer and business sentiment . The Committee understands that the complexity surrounding the international environment will help to intensify and accelerate the ongoing process of moderation in domestic activity, which is already manifest, for example, the retreat of the growth projections for the Brazilian economy. Thus, the relevant horizon, the balance of risks to inflation becomes more favorable. Incidentally, this also points toward a revision of the scenario for fiscal policy. 


In this context, the Committee believes that, to promptly mitigate the effects from a global environment more restrictive, a moderate adjustment in the level of base rate is consistent with the scenario of convergence of inflation to the target in 2012. 


The Committee will monitor carefully the evolution of the macroeconomic environment and developments in the international scenario and then define the next steps in its monetary policy strategy. 


Brasilia, August 31, 2011

And for google translate non-believers, here is the same thing translated by Reuters:

"The monetary policy committee decided to reduce the Selic rate to 12.00 percent per year, without bias, with five votes in favor of the cut and two votes to keep the Selic rate at 12.50 percent. Reevaluating the international scenario, the committee considers that there has been substantial deterioration, shown by, for example, generalized and large reductions in growth projections for the principal economic blocks. The committee understands that this increases the chances that restrictions that are today seen in various mature economies will prolong themselves for a longer period than expected. The committee also notes that in these economies, there appears to be limited space for the utilization of monetary policy and that a restricted fiscal scenario prevails. Therefore, the committee understands that the international scenario shows a bias toward disinflation on the relevant horizon.


"For the committee, the transmission of foreign developments to the Brazilian economy could materialize through various channels, among them the reduction of trade, moderation of investment flows, more restrictive credit conditions and worsening consumer and business sentiment. The committee understands that the complexity surrounding the international environment will contribute to the intensification and acceleration of the current process of moderation of domestic activity, which has already manifested itself, for example, in the reduction of growth forecasts for the Brazilian economy. Therefore, on the relevant horizon, the balance of risks for inflation becomes more favorable. Furthermore, the revision of the outlook for fiscal policy also points in that direction.


In this context, the committee understands that by mitigating at this moment the effects coming from a more restrictive global environment, a moderate adjustment of the basic rate is consistent with a scenario of convergence of inflation to the target in 2012.


The committee will attentively monitor the evolution of the macroeconomic environment and developments on the international scene to define the next moves in its monetary policy strategy.

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Boilermaker's picture

The ES is flat!  This must be serious!

trav7777's picture

what this effectively means is that demand for credit at 12.5% base rate has declined markedly...the BCB must adjust their pricing to follow the supply/demand curve

Long-John-Silver's picture

and another one bites the dust....another bites the dust.....dump dump dump


Surly Bear's picture

This is good, right? right?


Long-John-Silver's picture

it's just another fiat currency failing

Dr. No's picture

Well if there is a country who can handle it, it's brazil. The people have so little confidence in their currency and gov. They prosper despite the gov.

freethinker4now's picture

I love it when a plan comes together...

LoneStarHog's picture

Well isn't this a BRIC to the head ... Move over Reginald Denny.

Diablo's picture

wheres arminio fraga when you need him??!?!?


Space BATS's picture

Is this bad or good?

JohnG's picture

Bad.  Brazil has been buying $ like mad.  Not so much no mo.  The magic levitation continues.....

dollarcoaster's picture

Bad. Basilians do not like soy beans, only black beans, rice, samba s@x, and football!

Sequitur's picture

Fucking KABOOM. That's a substantial move.

Eating popcorn, while stroking my token Canadian gold maple ounce.

DoChenRollingBearing's picture

Mmm, gold.  Maybe I should bust out a few ounces and give them a stroke too.  They have been sitting in the dark for a long time.  I hope they do not feel unappreciated...

Popcorn too!

+ $1820 and green!

Sequitur's picture

I carry the one ounce maple with me. When I get depressed at the state of affairs, looking at all the debt, ignorance, and laziness around me, I take out my coin. It really does make me feel better. Think Inception and the personal reality tokens.

trav7777's picture

carrying a Maple is will scratch it up and then you'll get less from the dealer.  Many dealers don't even want to deal in mapes for this reason.  Anything beyond crown gold in purity is not meant to be carried; get an Eagle or Krug

chump666's picture

Brazil news took a chunk out of the AUD, FX markets are pricing in a possible China proplem.  If Australia cuts soon, then it's on. A US/EU and China slowdown...doesn't look good at all. 

Sequitur's picture

Yep wait for the AUD cut next. Circulatory currency firing squad, commence!

AUD's picture

Money market yields are somewhat ambiguous here at present. This can change overnight though.

chump666's picture

stocks are running on air, so i would be watching money market and CDS spreads.  a BRIC (Brazil) cutting rates is a hell bear signal.  China could be slowing down faster than reported.  Sth Korea is 100% heading into stagflation.

Central banks will freak on the Brazil cut.  Aust bank will cut now.  AUD 1.03 gets knocked out and you are on a winner

trav7777's picture

yes, Brazil has been so hot that this is a big move for them.  I have traveled there repeatedly and could measure the economic pace by the makes of cars on the roads.  Went from rarely seeing anything beyond the american brands to ML420s and X5s all over the place within the span of 6 months.

chump666's picture

Did you get to drink cachaca?  Brazillian females + Cachaca  ah yeah

trav7777's picture

wtf you ask me that question for?  Did I "get" to drink cachaca?  The shit is everywhere.  Brazil is cheap if you know where to shop.  And for dois reas you can be drinking this stuff by the beach all goddamned day.

brazilian girls are yet to be economic collapse tour has taken me to serbia, colombia, brazil, and iceland.  Each has some smokin hot chicks and in belgrade every 10th one look like a supermodel, but the brazilians have somethin you can't put your finger on.

JohnG's picture

Oh yes I can!!!!  I still like Ukrainians the best though, radiation be damned.

topcallingtroll's picture

Ukranians are definitly hot.  Any of you guys interested in meeting my Ukranian friend?  If you are height weignt proportionate and at least average looks you got a shot at this 27 year old hot babe.  I must warn you though.  She wants to get married and have kids, but it would be worth it if you know how Ukranian women tend to think.  From my sample size of two I feel that I can generalize to all Ukranian women!  They are loyal, will do you in any position you want at least once a day for the rest of your life.  All you gotta do is not cheat on them and put them on a pedestal.  It would be worth it.  Wish I had known when I was younger, but I digress.  If you are interested she said I could give out her email address to decent guys.  She is not looking specirically for an american so you foreign boys are in luck.  I will check back later and see if anyone is interested enough to send me a pic and a brief bio.  Yes I feel like a matchmaker today.

JohnG's picture

I have it now: the "TopCall Dating Service."  Nice.  Got an 800 number yet?



PS.  Sorry your only a 2?  :)

topcallingtroll's picture

animalistic heat.  the potential to completely let go with complete abandon.  Intensity, hedonic enjoyment without inner conflict.

There, put my finger on it

Not too many races or ethnic groups have it.  My observations are not unique, but it tends to become a stronger trait in warmer areas.

JohnG's picture

He said "warmer areas"  he he he he  Yet, cold can be very nice ass well.......yes I said ass, he he he he

chump666's picture

just trying to be polite to your dumb ass. 

There is good Cachaca and then there is shit stuff, maybe you drank the crap. 


chump666's picture

AUD meltup up on fudgy govt stats.  Ah well, it's all China after Brazil redflag.

caerus's picture

o brasil é lindo maravilhoso!


Space BATS's picture

So is this Bat Shit or Good Shit? 

SokPOTUS's picture

Boa Noite, Pirhanas!

AUD's picture

Rubbish, the cut was neither unexpected nor shocking. Money market yields in Brazil & elsewhere have been pointing to central banks cutting their overnight rates for weeks if not months.

I'll say it again, the bond speculators will not be denied their profits in the form of rising bond prices.

valuetrader's picture

Brazil is not the first and won't be the last. Turkey, with its huge inflation and massive money prining cut rates as well. This is another step made by politicians made to win the next elections and debase their currencies. Clearly we are going to have higher inflation everywhere. To be honest, the world just can't pay this debt (to itself I guess) and will simply start to inflate it more aggressively. We are seeing this everywhere:

1. BOJ doing a new n-th round of QE.

2. ECB buying PIIGS debt in size and lending to ''lightly'' solvent banks.

3. US talking about a new round of QE, twist or something equivalent. We are also hearing about a new mortgage program. I suspect that we are going to see (over time) some good size debt forgiveness in the US and this will be funded by printing money.

4. SNB printing money and using negative interest rates to weaken the currency. Latest t-bills came at -1% yield.

5. EM banks cutting rates and printing money. Actually printing money for them is nothing new as it is just an ongoing process that their Ivy League / Oxford educated central banksters know how to do very well.

6. Forgive me but I almost forgot the BOE. Some ''hawk'' was talking a day or two ago about the need for further QE. I think they are likely to do it at some point.

Don't think they can avoid it. The market, especially the FX market, is totally lost and doesn't know what to think. Look at EUR/USD, with the current European problems we should be trading at 1.10 at most. Instead we are testing 1.43-1.45 range. This is because the history of it tells you that the Fed prints faster and better than the ECB. I am growing uncertain if this is going to be the case now. Still, the ECB is dragged into money printing bitching and moaning and the Fed just looks for excuses why it is a good idea to do it. I guess this is the difference and also the Germans.

In this market few currencies are safe, hell, no currency is safe. The Chinese will keep their CNY strong to show off. SGD and CHF should survive somehow I guess but will be debased as well, most likely. Make up your mind what to do but just don't see alternatives for precious metals. I can see that some shares are cheap but the problem is that the world economy is so distorted by government intervention that you just don't know what can happen. For sure many of these ''successful'' companies would do poorly if there was no government action. The stock market in the US should've collapsed in the face of weak data - consumer confidence was horrible. Instead, we saw stronger market - further QE being priced in daily. Hell, what if the Fed disappoints and TheBernanke pulls the Bernanke put option. He is not likely to do that but I still don't see value in stocks. Precious metals can sell off if Fed disappoints but less in my opinion. Finally, gold is not going to go bankrupt but some companies may. Even if gold comes down, I have no doubt that it will go up after the Fed finally reconsiders, while the company that went down, well it will be gone. Still, wouldn't short stocks eihter but not the best to buy shares here and definitely stay away from financials.


trav7777's picture

look; central banks don't SET interest rate regimes- they follow them.

The CBs overnight rate is the base interest rate upon which all others are indexed because that's fundamentally where money ultimately is lent from.  If the CB sees diminished demand for credit, aka no offers at 12.5%, the rate must go down.  It's the same as a bond auction where the demand at a particular coupon dictates the pricing of the notes.

When you hit zero, you have to force money into the economy because nobody will borrow.  If all the things you could do with money could only earn you 0% ROI, you wouldn't borrow at 0.  This is where we and Japan effectively are already in a macroeconomic sense.

topcallingtroll's picture

activist central banks tend to set rates rather than follow them.  They floor the accelerator at inappropriate times for political reasons.

You can figure out if a central bank is being naughty sometimes by looking at yields and their spreads.  Where are turkey's and brazil's yields and money market rates right now?

Sequitur's picture

The rank market manipulation is the bitch of it. For anyone who's paying attention (admittedly not many, the vast majority are watching Real Housewives) all this intervention makes it impossible to invest or plan long term. Buy a house now? Invest in energy, consumer staples, pharma? And how much are dollars going to be worth in the future? You can't be certain of anything when goddamn central bankers and governments hatch a new "plan" every week, all of it market distorting.

Fundamentals? Sound money? Manageable debt-to-income? Long-term viability and solvency? Please, neither bankers nor traders give a fuck. It's all inside information and gaming the central bank and government moves.

DoChenRollingBearing's picture

This is an interesting development.

My beat, of course, is Peru.  Their currency (the Sol) has been relentlessly going up vs. the dollar for years, even until very recently.  I will be watching with great interest to see if Peru also decides to cut rates and start devaluing their currency as well.

Our company there has informed me that a strong Peruvian Sol works to the benefit of our company ("net-net"), so if their currency weakens vs. the dollar that is too bad for us.  But, we'll live.

Good article, Tyler!

CrashisOptimistic's picture

Pardon the one issue poster aspect of all this, but the dirty little secret of Brazil is that its ballyhooed deep water oil has not flowed yet (and might never flow in the quantities ballyhooed).

Latest report I saw is they IMPORTED oil.  This is never the path to prosperity.

trav7777's picture

oh, it's going to flow. Bank on that.

However, it's not going to flow in the idiots' manner of "divide reserves by desired consumption to get lifespan" nor is it going to flow at rates commensurate with surface fields of similar size class.  These HUGE fields will at most flow 500kbpd out of an 8BBbl reservoir.  The flow rates from wells this deep are pathetic actually.

Manthong's picture

So what does Obama get for his $2 billion?

reader2010's picture

Currency wars in disguise. Trade wars follow?

RobotTrader's picture



ES just got a bumped up.

IMA5U's picture

so the rally will continue


these late day sell offs continue to be bear traps

disabledvet's picture

I actually think Brazil lowering rates while not putting in a bid into equities per se definitely puts a bid into the greenback. with Canada entering a recession it's time for these "all that is foreign is good" money chickens to come home to roost. there has been so much speculation in the "inflation trade" (which the Fed has absolutely encouraged rhetorically btw) the fact that we have a synchronized downturn simply is not being aired and discussed with the appropriate alacrity by the MSM. I'm not big fan of QE at all which i think has caused all this "mal-investment" in the first place--having said that if The Bernank hadn't not only plugged interest rates at zero but committed to keep them there for two years i think we would be in far deeper donkey doo than we may be on the cusp of right now. Also I do think the statement against Congress and the White House by The Berank was completely mis-placed. It's Wall Street that almost in totality has simply followed the Fed's lead and bought treasuries and otherwise engaged in totally riskless behavior. I think we'll see if there are any animal spirits left in that town or not quite soon because quite frankly if this crowd can't be a buyer of these soon to be massively distressed assets at this time then they really aren't the people they've made themselves out to be.