beyondbrics

“Give me a one-handed economist!” President Truman used to ask. But look around the world at the moment, and it is divided between economists offering the kind of “on the one hand, on the other hand” advice that so exasperated Truman.

Brazil’s central bank clearly did not feel sitting on the fence was an option. It has just delivered a surprise 50 basis point cut. Financial markets’ parsing of this unexpected move is that Brazil believes growth rather than inflation is its biggest concern. This has prompted economists at HSBC to wonder who might be next. “Will everyone now go Brazilian?” it asks.

In a Global Research note to clients HSBC says:

Brazil’s move showed that EM central banks are more defensive than some might have thought. The trauma of 2008 simply sits too deep. Expect everyone, with only a few select exceptions like India, and perhaps Thailand, to lay off tightening for a while.

Yet again, or on the other hand, a look at China suggests that this generalised line of thinking  not be the case. Last Friday, Beijing sent out the opposite message, by raising reserve requirements on off-balance sheet deposits. So who is right – Brazil or China?

Gavekal, a consultancy, suggests the difference between the two is that Beijing is hyper-sensitive to the socially destabilising effects of inflation.

“After all, Marx did explain that Louis XVI lost his head because of the poor harvests and high food price inflation in the late 18th century,” it writes, pointing to the Tiananmen events of 1989 which Beijing believes had more to do with high-inflation than any call for greater democracy.

“Needless to say, this hardcore belief that inflation is the number-one threat to social stability (and Communist Party rule) will have only been amplified by this year’s events in the Middle East,” Gavekal adds.

Brazil’s situation is of course very different. Its government does not need to worry about angry riots to rising food prices. It is more worried about growth and maintaining the country’s much needed infrastructure build up.

So the answer to Truman’s request then? It all depends.

Related reading:
Citi: EM equities to recover – soon, beyondbrics
Brazil in shock rate cut, beyondbrics
Overdrafts: Brazil’s expensive addiction, beyondbrics
Brazil’s slowdown gets even slower, beyondbrics