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01 Sep 2011

Brazil surprisingly cuts intesrest rates

Brazil surprisingly cuts interest rate to 12 percent amid recession fears

Brazil's Central Bank announced an unexpected reduction of half point in the interest rates, now fixed in 12 percent. Most analysts expected the committee to maintain the indicator. The cut was backed by five votes against two on the bank's board. This was the first time the Central Bank cut the rates in 2011, after five consecutive increases.

The official statement from the Committee of Monetary Policy, published on the Central Bank's website, explains that "Re-evaluating the international scenario, the Committee considers there was a substantial deterioration, reflected in generalized reduction of great magnitude in the growth projections for the major economic blocs". The fear of a recession in the United States and Europe had a bigger impact on the decision than the inflationary pressures.

Martin Nymark, CEO from Exact Group, was not entirely surprised about the move. After the consecutive interest rises, he believed that at some point soon the policies would have to switch direction.

"Since the new year, President Dilma Rousseff has implemented tighter and more restrictive fiscal policies in the Brazilian economy. I believe it makes sense to have a relaxation. However, this is just a small step, since Brazil still has the highest interest rates in the world. On the long run, we expect a decrease in the interest rates and in the real interest rates", explains Martin Nymark.

Despite the recent cut, Brazil still tops the ranking of the highest interest rates in the world, considerably ahead of countries which also have high rates, such as Russia and Egypt (both with 8,25%), India (8%), China (6,56%) and Turkey (5,75%). For the last 20 months, Brazil has likewise been on the lead in real interest measures. With the cut, Brazilian real interest rates are now 6,35% a year, followed by Hungary, with 2,8%, according to measures made by the international broker "Cruzeiro do Sul". The expectations about the interest rates also influenced the Brazilian Real. The currency rose 0,3% - a two week high - to