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Brazil Reduces Key Interest Rate by 0.75% to 17.25%

Brazilian and Latin American stocks headed lower, as investors continued to lock in some of the region’s robust gains at the start of the year. Shares were also pressured by concerns about the inflationary impact of high oil prices.

Oil prices have risen recently amid worries about potential supply disruptions in Iran due to diplomatic tension over the country’s nuclear stance.

Brazil’s Bovespa Index dropped 314.18 points, or 0.87%. Mexico’s benchmark Bolsa Index tumbled 223.67 points, or 1.21%, while Argentina’s Merval Index fell 16.07 points, 0.97%.

Brazilian stocks dropped, extending yesterday’s losses, as investors continued taking profits following strong early-year gains.

A recent run-up in oil prices also weighed on the market. Investors fear that high fuel costs could push currently tame domestic and U.S. inflation higher.

Higher inflation at home could in turn inhibit Brazil’s central bank from loosening monetary policy further in a bid to jumpstart the economy.

Meanwhile, a resurgence in U.S. inflation could prevent the Federal Reserve from ending its cycle of interest-rate hikes in the near term. High U.S. interest rates tend to draw funds away from emerging markets like Brazil.

Buyer enthusiasm in today’s market session may have also been limited by caution ahead of the Brazilian central bank’s interest-rate decision which was expected for the end of the day.

The bank was widely expected to extend its run of interest rate cuts at its first meeting of the year. Economists were largely expect the bank to reduce the Selic interest rate by between 50 and 75 basis points from its current 18% level.

The expectations were met. After a meeting that lasted five hours, the Central Bank’s Copom (Monetary Policy Committee) decided by a unanimous vote to reduce Brazil’s benchmark interest rate, the Selic, by 0.75%. This brings the Brazilian key interest rate down to a still quite high 17.25% a year.

In economic news, Sao Paulo’s Fipe research institute said its consumer price index climbed 0.59% in the four weeks ended January 15, compared with an increase of 0.46% in the four weeks ended January 7. Market expectations were for inflation between 0.48% and 0.61%.

On the corporate front, paper and pulp maker Votorantim said its fourth-quarter net profit dropped to 80 million reais from 181 million reais in the year-ago period, as results were hurt in part by the real’s appreciation against the U.S. dollar.

Meanwhile, the Justice Ministry Antitrust Division unanimously approved European steel giant Arcelor’s purchase of a 25% stake in Brazilian specialty steelmaker Acesita from two local pension funds.

Elsewhere, Mexican shares sank, in line with Wall Street, as investors continued to cash in some of the market’s strong gains in the first two week’s of the year. In the news, food maker Gruma was in focus after a major brokerage initiated coverage of the stock with a "neutral" rating, citing a "strong runup" in the company’s valuation in recent months.

In political developments, an opinion poll conducted by Mexico City newspaper Milenio suggested that Mexico’s presidential race is close. The survey indicated that Andres Manuel Lopez Obrador of the left-wing Democratic Revolution Party has 37% of voter preferences, followed by Felipe Calderon of the ruling National Action Party with 31%. Roberto Madrazo of the Institutional Revolutionary Party has 30%.

Elsewhere, Argentine issues retreated, as investors digested fresh economic data. National statistics agency Indec reported that industrial production rose 7.9% in December from a year earlier and edged up 0.1% from November.

Economists had expected December production to climb 7.8% from a year ago. Meanwhile, the capacity utilization rate slowed to 69% in December from 72.1% in November, marking the second-lowest level of 2005.

Thomson Financial – www.thomsonfinancial.com

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