Market responds with euphoria to interest rates at 12%.

247 - Stock market investors have defied analysts and are driving the Bovespa trading session to an exuberant morning of gains. From the very first minute, stocks have been rising and just now registered a 3,45% increase, with the Ibovespa at 58.422 points. This movement today is curious, as it puts financial market and stock market analysts on opposite sides.

Those in the financial market are 'shocked' by the half-percentage-point interest rate cut sponsored by the Copom yesterday. On the other hand, those in the stock market are betting on growth and a return of corporate profits with the fall in interest rates.

JP Morgan released a report this morning raising the potential gains for stocks, following the Selic rate cut. Meanwhile, analysts from all quarters, including former Central Bank officials such as Gustavo Loyola and Alexandre Schwartzman, explicitly comment that the Central Bank erred in reducing interest rates.

The discourse always revolves around the loss of independence and the danger that inflation represents. Two comments are interesting:

1) The Copom, composed of a mixed bag of academics and career civil servants, should not have more power than a government elected by more than 50 million Brazilian voters. In other words, this independence is relative in a country like Brazil.

2) Half a point here or there shouldn't make much difference in a context where the interest rate is the highest in the world, in this case, the Brazilian rate.

Read below the news article from 247 regarding the Copom decision:

The Monetary Policy Committee (Copom) surprised everyone today by deciding to reduce the benchmark interest rate (Selic) by 0,50 percentage points to 12% per year. With this decision, the Central Bank's board interrupts the monetary tightening process that began in January of this year.

A survey conducted by Agência Estado with 72 financial market institutions showed that there was unanimous agreement on the stability of the Selic rate at 12,50% at this meeting of the Central Bank committee. From January to July, the Selic rate was raised by 1,75 percentage points.

The committee has two more meetings scheduled for 2011. The next Copom meeting is scheduled for October 18th and 19th, and the last meeting for November 29th and 30th. The minutes of today's meeting will be released by the Central Bank next Thursday, September 8th.

Earlier this week, the Minister of Development, Industry and Foreign Trade, Fernando Pimentel, said today that he expected "an adequate benchmark" for the benchmark interest rate (Selic) at the meeting of the Monetary Policy Committee (Copom). "We are not going to make predictions, but we are creating the conditions so that, if not now, we can reduce interest rates, which is a condition for sustainable economic development," he said at a hearing in the Senate. "We are eager for the moment when interest rates will fall in Brazil," he added.

He also said that it is necessary to increase the investment rate in the country. "Our investment rate is very low, at 19% of GDP (Gross Domestic Product)," he said. According to him, the government aims to raise this percentage to 25% of GDP. "We will review these goals periodically in the National Council for Industrial Development (CNDI) to reach 25% as quickly as possible," he stated.