What next for Brazilian rates?

The decision by the Central Bank of Brazil last night to cut interest rates by 75bps to 9% was widely expected. Instead, the critical issue for investors is whether this marks the end of the current easing cycle and, perhaps more importantly, how quickly the Bank may now be forced to start tightening policy. While there are signs that the economy is starting to find its feet after a difficult second half to 2011, we think it is too soon to rule out further cuts and, moreover, doubt that policymakers will start to raise rates as quickly as the market currently expects.