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Brazil cuts interest rates again

February 2018

Emerging equity markets were not immune to the heavy declines experienced by developed share indices during February. Investors around the world were rattled by signs that the end of a period of low-cost borrowing was approaching more rapidly than expected. 

  • Xi Jinping’s increased his influence in China
  • India’s economic growth gained momentum
  • Fitch downgraded its credit rating for Brazil, but upgraded its outlook

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Emerging equity markets were not immune to the heavy declines experienced by developed share indices during February. Investors around the world were rattled by signs that the end of a period of low-cost borrowing was approaching more rapidly than expected. 

“Policymakers at Brazil’s central bank voted unanimously to cut its key Selic interest rate”

In China, the Shanghai Composite Index fell by 6.4% over the month. China’s presiding Communist Party is reassessing its rule that the President and Vice-President of China can serve no more than two consecutive terms. Incumbent President Xi Jinping is poised to begin his second term in office, but may now stay in power beyond 2023. Meanwhile, “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” is set to be added to the state constitution in a move that suggests Mr Xi’s power is intensifying.

India’s benchmark CNX Nifty Index fell by 4.9% during February, despite encouraging economic data. India’s economy continued its strong growth over the final three months of 2017: having expanded at an annualised rate of 6.5% between July and September, the country’s economy grew by 7.3% between October and December. Looking ahead, the World Bank predicts India’s economy to grow by 7.3% in 2018.

Credit ratings agency Standard & Poor’s (S&P) expects India to grow by 7.8% in 2018. Whilst acknowledging the short-term impact of demonetisation in 2016 and the imposition of the goods and services tax in 2017, S&P believes the medium-term growth outlook remains “favourable”, underpinned by private consumption, an “ambitious” private infrastructure programme, and plans to undertake bank restructuring. 

Policymakers at Brazil’s central bank voted unanimously to cut its key Selic interest rate by 0.25 percentage points to 6.75% at their February meeting. The Copom believes that inflationary developments are “favourable, with various measures of underlying inflation running at comfortable or low levels, (including) components that are most sensitive to the business cycle and monetary policy”. Looking ahead, inflation in 2018 is expected to be around 3.9%, with forecasts of 4.25% and 4% respectively for 2019 and 2020. The Bovespa Index rose by 0.5% during February. 

Credit ratings agency Fitch downgraded its rating for Brazil from “BB” to “BB-“, but upgraded its outlook for the country from “negative” to “stable”. Fitch cited Brazil’s “persistent and large fiscal deficits, a high and growing government debt burden and the failure to legislate reforms that would improve the structural performance of public finances”.


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