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Brazilian interest rates fall to historic low

The Brazil Central Bank recently announced the lowest interest rates since 1986. The latest cut brought Brazilian interest rates to 7%, down by over half in a year. The reduction is likely to have very positive effects on the economy as a whole and on the property market in particular.

In October last year, Brazilian interest rates stood at 14.25% as the Central Bank sought to keep high inflation at bay. Just over a year later, however, and it’s a completely different story. In the latest cut at the beginning of December, interest rates have come down to 7%.

The new rate is lower than the 7.25% interest in October 2012 and the lowest on record. At their meeting, Brazil Central Bank authorities did not rule out further interest rate cuts in February next year. Analysts widely believe Brazilian interest rates will probably drop to 6.5% at the next meeting.

Lower inflation behind the cuts

General improvements to the Brazilian economy and a curb on inflation are responsible for the gradual interest rate reductions seen throughout this year. Financial measures imposed by the government and Central Bank have done much to slow inflation, predicted to end the year at around 2.9%.

The rate is well below the official target for 2017 of 4.5%, plus or minus 1.5%. Consumer confidence and increased retail spending have gone hand in hand with the drop in inflation.

Good economic outlook for 2018

The consensus among economic analysts generally points to a much-improved economic situation in Brazil next year. In a report dated 8 December, Morgan Stanley stated that “Brazil is back and will blow Mexico away next year”.

The consultancy company bases its predictions on several factors including expected growth rate for the two countries. Brazilian GDP growth is predicted to reach 3.1% in 2018 while Mexico’s will register just over half this at 1.8%.

Morgan Stanley also include the recent cuts in Brazilian interest rates as part of their rationale. Lower rates are “bullish for stocks and for bond holders who are sitting on higher yielding debt,” says the report.

According to the company’s calculations, lower rates could “free around R$100 billion (approximately US$33 billion) in disposable income because of lower financial service costs for consumers and businesses”.

Lower rates good news for property market

The latest reduction in Brazilian interest rates also bodes well for the property market. As lending costs drop, mortgages become more affordable. Buyers can also buy more for their money.

Mirroring the country’s economy, the Brazilian property market has also seen improvements this year. Figures for Q3 2017 released by the Brazilian Chamber of Construction Industry (CBIC in Brazilian) show significant upticks in both sales and launches compared to the same period last year. Sales went up by 4.2% and launches by 14.7%.

Latest FipeZap price indices for the country as a whole showing property prices went up by 0.03% by the month in November. Since the index began in June 2012 when Brazilian interest rates stood just slightly above their current rate, prices for property have gone up by 29.4%.

(Sources: Brazilian Central Bank, FipeZap, ABECIP)

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