Tricky 12 Months Seen for Brazil Policy Makers

Despite Brazil’s improved fundamentals and investment grade ratings, inflation pressures and global economic trends mean its economy could be in for a tricky time over the next year, characterized by continued interest rate hikes. “My bet is that the Brazilian Central Bank is nowhere near the end of the rate hike cycle,” Gray Newman, senior LatAm economist at Morgan Stanley, told a Brazilian-American Chamber of Commerce event in New York. His shop sees an interest rate peak of 14.25%, from 13.00%, on the back of high commodity prices, that will boost Brazilians’ purchasing power, adding to inflation pressures. If the currency continues to strengthen, Newman says, many non-commodity producers should also see vulnerability from a balance of payment perspective. Morgan Stanley sees the BRL ending 2008 at 1.70 to the USD, versus BRL1.57 Tuesday.