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November 4, 2019

Chart of the Week: Brazilian bonds bounce back, but will it last?

by Fathom Consulting.

Brazil’s central bank cut its key policy rate from 5.5% to 5.0% in October, taking the rate to the lowest level in more than two decades. The move follows that of many other central banks in both advanced economies and emerging markets, with global inflationary pressures remaining subdued. Inflation in Brazil has declined too, falling from 3.4% to 2.9% in September, and the country’s central bank suggested that it would trim the policy rate by another 50 basis points to 4.5% in December. The cutting cycle has underpinned a rally in the country’s bonds, but investors will be hoping that this does not prove to be a false dawn, as it was in 2012. Back then, the policy rate was cut significantly, but these cuts were subsequently reversed as inflation began to rise. That hiking cycle coincided with the worst recession in the country’s recent history.

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