Thanks to worsening global economic conditions, Brazil decided to bite the bullet and cut interest rates by 50 basis points to 11.5% last week. In fact, Brazil is no stranger to interest rate cuts as they already slashed rates also by 0.5% in August. But unlike in August when the rate cut was met with opposition by two central bank policymakers, this month's rate cut was a unanimous decision.
For the central bank officials, there was hardly any improvement in the global economic landscape since they first cut rates in August. Come to think of it, the situation actually worsened as euro zone leaders can't stop bickering over how to keep the debt crisis contained. On top of that, the U.S. is facing the possibility of an economic meltdown, which could be devastating for the global economy.
Aside from shielding Brazil from these potential damages, the recent rate cuts can also keep the Brazilian real from appreciating, consequently boosting demand for Brazil's exports. In turn, a booming export industry could provide support for Brazilian companies and have a positive impact on economic growth.
But should Brazil really be concerned about its growth prospects? Their economy is expected to expand by 3.5% this year, which is way more than what larger economies could aspire for. GDP growth seems to be the least of their problems, not to mention inflation which has also been on the up and up. Their annual CPI is expected to reach 6.52%, just a bit beyond their government's 6.5% target.
With the recent rate cuts, Brazil is expecting even stronger inflationary pressures in the next few months. Although this could pose a potential problem in the future, their central bank decided to focus on the more pressing concerns, namely the euro zone debt crisis and the possibility of another global economic slowdown, and acted on it right away. Heck, the major economies could take a page out of Brazil's book and take action too!
Were it not for inflationary concerns on the home front, Brazil would've probably stepped up its game and cut rates by a full percentage point. Rumors that the euro zone summit would be delayed crushed hopes that a solution to the debt crisis would be found in time, prompting several economic hotshots to clamor for more aggressive action from the Brazilian central bank.
But as Big Pippin's love advice usually goes, "When things are uncertain, it's better to take it slow." Whether it's about matters of the heart or global economic concerns, the situation usually gets more complicated if you do too much too soon. Then again, as the Spice Girls put it, "Too much of nothing is just as tough."
I know you're thinking, "This old man seriously needs to update his playlist!" but l'd rather focus on figuring out what Brazil's rate cut could mean for the other emerging economies instead. Will the rest of the BRIC gang follow Brazil's footsteps soon?
If the situation in the euro zone and in the U.S. doesn't get any better, we might just see some rate cuts from the other BRIC nations. Bear in mind that rates in India and Russia are at 8.25% while China's interest rate stands at nearly 6.6%. Although it did take a ton of rate hikes to get to these levels, these nations have already stopped increasing interest rates since July this year.
If they eventually decide to start cutting interest rates, the emerging economies can stimulate domestic demand and reduce the negative impact of global threats on their own economies. In other words, the emerging economies can only do so much and their actions may be limited locally. When it comes to eliminating those global economic threats, the burden still falls on the major economies and it's about time they started cleaning up the mess.
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