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Friday, January 11, 2008

Inflation and Interest Rates

Brazil's real rose again yesterday after Federal Reserve Chairman Ben Bernanke signaled the U.S. central bank may cut interest rates further this month to shore up growth in the world's largest economy. The real rose 0.6 percent to 1.7570 per dollar at 2:26 p.m. New York time after weakening as much as 0.2 percent earlier.

The outlook for lower interest rates in the U.S. makes Brazilian domestic fixed-income assets more attractive. Brazil's real interest rate, or the difference between the central bank's 11.25 percent benchmark lending rate and the country's 4.19 percent annual inflation, is 7.06 percent, the highest in any emerging market. In the U.S., the benchmark borrowing cost is 4.25 percent and on its way down, since Bernanke's comments have greatly increased speculation the policy- setting Federal Open Market Committee will cut the federal funds target by a half-percentage point on Jan. 30.

``Additional policy easing may well be necessary'' to offset ``downside risks'' to U.S. growth, Bernanke said in his first speech on the economy since the Fed's Dec. 11 meeting. Lower interest rates may be required ``in light of the recent changes in the outlook for and the risks to growth,''

Yields on Brazil's zero-coupon bonds rose on speculation Brazil's IPCA consumer price index will probably show inflation accelerated more than economists forecast.

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