Brazil Sees World's Highest Interest Rates Climb Even Further|
Mar. 4, 2011
Published by Minyanville
One of the world’s highest interest rates was hiked further on Wednesday as Brazil attempted to slow rapidly accelerating inflation. It's the second time in three months the rate has risen, this time 50 basis points from 11.25% to 11.75%.
Inflation rose to 6.08% for the year through to the middle of February, the fastest since December 2008 and massively overshooting the central bank's target of 4.5%.
The government will be keen to maintain growth however. High interest rates attract foreign investment, pushing up the value of the local currency (the real) against the US dollar and making manufacturers and exporters less competitive.
In power only two months, President Dilma Rousseff appears to have made a cautious move according to analysts, many of whom expected a larger rate rise. The country’s central bank meets to announce the next interest rate change 20th April, with some economists predicting it may hit 12.5% by the end of 2011.
However with economic growth slowing, some are hoping the central bank will pause rate rises in April, despite he bank signaling the rate will go up.
GDP expanded 5% in the fourth quarter from the same period in 2009, down from 6.7% the previous quarter and lower than the 5.2% expected by many analysts. The decline is thought to be due to expansion in services.
"It's inevitable that this [rate hike] will attract more investment inflows into Brazil," Luiz Henrique Didier, partner of the Didier-Levy brokerage in Sao Paulo, said to the Wall Street Journal. "This is especially true given that interest rates in many traditional investment venues are near zero."
After last week’s record successes in the banking sector (see Banks Are Brazil's Big Winners for 2010) -- largely due to high interest rates, the rate hike will see bankers further increasing their spreads, and profitability.
Oil's Well... Oil price increases were not passed onto consumers leaving investors in state-oil company Petrobras disappointed. Despite record fourth-quarter profits up 17% from the same period in 2010, the company failed to match the private sector’s big oil players which also saw net growth of more than 50% since 2009.
Analysts believe the company will capitalize on high oil prices thanks to events in the Middle East, and is most likely to see high first quarter net revenue. Brazil’s own economy is likely to fuel demand in the domestic market.
Petrobras is continuing to invest in research and exploration. On Tuesday it announced it had discovered oil in southeast Brazil, 230km from the coast. Houston company FMC (FTI) has received a $125m order from the company for undersea oil well equipment. The equipment is likely to be delivered in 2013 and demonstrates Petrobras’ motivation for keeping up momentum in oil production. One Guera field site was shut down this week as a pipeline broke, but the wells at the site are newly discovered and likely to keep pumping oil for a long time.
Petrobras is waiting patiently for Venezuela’s state oil company Petroleos de Venezuela (PDVSA) to get approval for a $2.17 billion loan from the Brazilian National Development Bank, in order to push on with a joint venture in a $13 billion refinery in northern Brazil. The project has had a few hurdles to jump as costs have spiraled, there's been allegations of overcharging, and difficult negotiations between the companies.
Flying Higher: Brazil's airline industry appears to be booming with Trip Linhas Aereas buying four aircraft from Embraer (ERJ) for roughly $172 million, adding to its existing 20 jets from the manufacturer. Recent forecasts predict the market to double over the next five years, thanks to a surge in demand for air travel by the new middle class. Reuters reports the Brazilian government is expecting some 40 million people to join the middle class in the next three years.
Airline TAM (TAM) has also been upping its fleet size with the order of two 777-300 aircraft from Boeing (BOE) for a reported $569m. The airline is looking to expand its long-haul routes by adding the aircraft to the ten existing planes on order from the Seattle giant.