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The New Brazilian Situation

The fragility of the global economy and with it, the less pressure on inflation in Brazil were again the arguments used by the Monetary Policy Committee to reduce, for the eighth straight time, the basic interest rate . By unanimous vote, the directors of the Central Bank decided yesterday to cut the rate by 0.5 percentage points, as expected by almost all financial market analysts. As a result, interest rates, which were already at the lowest level in history, fell to 8% per year. For economists, the action of the Central Bank reinforces the idea that, when you need to raise interest rates in the future, the rate will hardly exceed double digits. In the statement of the college, almost equal to that of the previous meeting, was not given any sign that the cuts ended up here.

With the new cut, the real interest rate in Brazil, considering the inflation forecast for the next 12 months hit a record low of 2.3% per year. The rate kept Brazil ranking third in the world real interest, behind China (3.7%) and Russia (3.5%).

Economists had been decreasing since the forecast for interest rates because of signs of weakness in major world economies, growth in Brazil much less than expected and inflation risks that has not offered. In the first quarter, growth was recorded by country of just 0.2% over the last quarter of 2011. Factored into this account the possibility that the impact of global crisis is far greater than expected before. In the minutes of the previous meeting of the Monetary Policy Committee - announced earlier this month - the committee removed the part that stated that the current crisis would only be the size of a quarter of what was the turmoil of 2009.

Both in view of the Central Bank and in the most market analysts, the growth slowdown of the Brazilian economy was boosted by the weak global economy.

Economists are unanimous in saying that once the economy gains which, in the jargon of the market, called "traction" - next year - the Monetary Policy Committee does not need to raise interest rates again to a level of two digits to control inflation . This is because the economy is experiencing a new reality of more civilized and rates compatible with the rest of the world because the monetary authority took advantage of the gap given by the crisis to create a new level for Brazil.

Where to Invest?

It is known that the actions of the Banco do Brasil SA (OTCPK:BDORY) deserve to negotiate a discount due to political risk, but the discount seems excessive compared to the current results of the bank.

With a 10% dividend yield this seems to be a much better option than Vale S.A. (NYSE:VALE) and Petrobras - Petroleo Brasileiro S.A. (NYSE:PBR) because it depends on the domestic consumption that is favored by falling interest rates. and does not rely on commodities which can be harmed by the downturn of the Chinese economy

Disclosure: I am long OTCPK:BDORY.