Brazil Eases Into the Fall

August 23, 2023 | David Hernandez, CFA, Director of Traditional Manager Search

This chart description is for illustrative purposes only and its accuracy cannot be guaranteed. Please see full disclosures at end of PDF document in the web post. General description: Two-line chart showing Brazil CPI and Brazil Key Rate. Chart subtitle: Brazilian officials lowered the country’s key rate earlier this month in response to falling inflation. Chart source: Bloomberg as of August 2, 2023. Chart visual description: Data is monthly. Y-axis ranges 0-16%. X-axis ranges from January 2012 through April 2023 in 5-month increments; data is complete through July 31, 2023. Brazil CPI (YOY) is plotted in light blue line and Brazil Key Rate is plotted in dark blue line. Please contact us for the full dataset. End chart description. See disclosures at end of document.

On August 2, Brazil’s central bank cut its benchmark interest rate by 50 basis points, from 13.75% to 13.25%. This marks the country’s first rate cut in over three years and is in stark contrast to moves made by Brazilian policymakers in recent time. To that point, between February 2021 and July 2022, Brazil increased its key rate from 2.00% to 13.75%, representing the most aggressive monetary tightening by any central bank during this period. The August cut was made possible by a moderate domestic inflation rate of 3.2%, which sits well below the country’s post-pandemic peak of 12.1% exhibited in April of last year. Brazilian authorities have indicated that additional cuts are likely in the near future, thanks in large part to an improving consumer price outlook and longer-term inflation expectations that continue to fall. These dynamics place the country ahead of much of the globe when it comes to the cycle of interest rates, as many nations, particularly those in the developed world, continue to fight elevated inflation via restrictive monetary policy. Alternatively, other Latin American countries like Chile, Mexico, and Peru have either lowered rates in recent time or are expected to embark on easing campaigns within the coming months.

As it relates to performance, Brazilian equities have been a bright spot within the emerging markets space in 2023 and have significantly outpaced the MSCI EM index on a year-to-date basis through the end of July (22.6% vs. 11.4%). Expectations of a shift in monetary policy which has now come to fruition, coupled with better-than-expected fiscal and political outlooks, have boosted sentiment and helped fuel these strong returns. Should monetary conditions continue to ease, Brazil and its Latin American peers may continue to provide an attractive opportunity set for investors going forward.

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David Hernandez, CFA
Director of Traditional Manager Search

Get to Know David

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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