Reuters Market News Brazil's markets tumble on rate hike, new polls Monday October 14, 3:11 pm ET
By Todd Benson
SAO PAULO, Brazil, Oct 14 (Reuters) - Brazil's currency and stocks slumped on Monday afternoon in volatile trading after the Central Bank surprised the market by jacking up interest rates in a bid to keep a lid on inflation.
ADVERTISEMENTA fresh batch of opinion polls released over the weekend was also casting a dark cloud over the market, gnawing away at investors' hopes that Jose Serra can overtake leftist front-runner Luiz Inacio Lula da Silva in a presidential runoff vote on Oct. 27.
After plunging 3 percent in early trading, Brazil's currency, the real (BRBY), briefly reversed course in the wake of the rate hike, touching Friday's closing level of 3.82 per dollar. But the change in direction was short-lived and the real later weakened 0.52 percent to 3.84 to the greenback.
"Nobody really understands what the Central Bank is trying to do," said Sergio Machado, Treasury Director at Banco Fator in Sao Paulo. "If they really want to stop the currency from weakening, they're going to have to hit harder than that."
In an extraordinary policy-setting meeting on Monday, the monetary authority said it unanimously decided to raise its key interest rate by 300 basis points to 21.0 percent to stave off rising consumer prices.
Stocks also slumped in the wake of the decision, with the Sao Paulo Stock Exchange's benchmark Bovespa (Sao Paolo:^BVSP - News) index falling 3.87 percent to 8,512.11 points in nervous trade, dragged down by fears that the rate hike could further slow Brazil's already sluggish economy.
"The economy is already growing at a snail's pace, and now it runs the risk of slipping into negative territory," said Cristiano Oliveira, chief economist at Banco Schahin in Sao Paulo. "That's bad news for the stock market."
Taking the biggest hit was market heavyweight Tele Norte Leste Participacoes, or Telemar (Sao Paolo:TNLP4.SA - News), whose shares plunged 5.56 percent to 20.40 reais. Telemar stock accounts for about 14 percent of the Bovespa index.
Another actively traded stock posting hefty losses was oil company Petroleo Brasileiro, or Petrobras (Sao Paolo:PETR4.SA - News; NYSE:PBR - News), whose shares tumbled 4.2 percent to 35.50 on news that one of its offshore rigs ran the risk of being sunk by an electrical fault.
MARKET BAFFLED
The surprise rate hike comes three days after the monetary authority hiked the minimum reserve requirements for banks and halved the maximum exposure banks can have in foreign exchange assets in a bid to limit their ability to speculate against the currency.
The real rallied 4.5 percent on Friday in the wake of the new measures, which go into effect on Wednesday and are expected to drain some 14.2 billion reais ($3.8 billion) from the financial system and prop up the real.
The beleaguered currency has shed more than 40 percent of its value so far in 2002, the bulk since April, fanning inflation and whipping Latin America's largest economy.
"The inflation concerns are understandable, but the Central Bank didn't even give Friday's measures a chance to have an impact," said Fator's Machado. "This isn't how you combat a devaluing currency."
At its last rate-setting meeting in mid-September the Central Bank held rates steady at 18 percent and switched to a neutral bias from an easing bias.
Adding to the market jitters were two new opinion polls showing presidential candidate Lula, a former union leader who still spooks investors for past talk of debt restructuring, with a commanding lead over market favorite Serra.
Workers' Party candidate Lula was 30 percentage points ahead of Serra in a Vox Populi poll on Sunday, while on Saturday pollster Datafolha put Lula's lead at 26 percentage points with just two weeks until election day.
"From the market's perspective, the polls were a lot worse than expected," said Alexandre Vasarhelyi, head of foreign exchange at ING Bank in Sao Paulo.
The Central Bank's next policy meeting is set for Oct. 22-23, days before the runoff vote.