Banco Central do Brasil confusa mercados

Traders’ Math Made Worthless by Stealth Rate Cut: Brazil Credit

By David Biller & Blake Schmidt - Jan 15, 2013 9:11 AM GMT-0200

The Brazilian central bank’s refusal to enforce its benchmark rate target is eroding traders’ ability to bet on monetary policy decisions and prompting economists to speculate that the inaction constitutes a stealth rate cut.
The rate that banks charge each other for overnight loans, known as DI, was 6.93 percent on Jan. 14, marking the 23rd straight day it has been more than a quarter-percentage point below the central bank’s 7.25 percent target. The 0.32 differential is more than double the average over the past decade and compares with gaps of less than 0.1 percentage point in the U.S. and neighbors Colombia and Chile.

Central Bank President Alexandre Tombini

Paulo Fridman/Bloomberg

The growing rate gap in Brazil, which was sparked by an increase in cash levels that central bank President Alexandre Tombini has left unchecked, is rendering useless traders’ models designed to calculate the probability of policy moves in coming days and months, according to Votorantim Ctvm Ltda.

The growing rate gap in Brazil, which was sparked by an increase in cash levels that central bank President Alexandre Tombini has left unchecked, is rendering useless traders’ models designed to calculate the probability of policy moves in coming days and months, according to Votorantim Ctvm Ltda. Photographer: Paulo Fridman/Bloomberg

The growing rate gap in Brazil, which was sparked by an increase in cash levels that central bank President Alexandre Tombini has left unchecked, is rendering useless traders’ models designed to calculate the probability of policy moves in coming days and months, according to Votorantim Ctvm Ltda. By allowing the overnight rate to drop, Tombini is adding stimulus to a sputtering economy without having to announce the 11th reduction in the target since 2011.
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