Bloomberg News

Brazil Rate Futures Rise on Bets for Smaller Central Bank Cuts

October 04, 2011

Oct. 4 (Bloomberg) -- Yields on most Brazilian interest- rate futures contracts rose, partly reversing yesterday’s decline, on speculation the central bank won’t cut interest rates as aggressively as it did three years ago after the collapse of Lehman Brothers Holdings Inc.

Yields on the futures contract due in January 2013 increased 13 basis points, or 0.13 percentage point, to 10.27 percent at 5 p.m. in New York. The real strengthened 1.8 percent to 1.8581 per dollar, from 1.8911 yesterday.

Traders are paring bets that the central bank will accelerate the pace of cuts to borrowing costs after they lowered the Selic rate 50 basis points to 12 percent on Aug. 31. Moderate rate cuts are more appropriate as policy makers are acting quickly and don’t expect the European debt crisis to be as deep as the 2008 credit crunch, said a government official familiar with monetary policy who asked not to be identified because he isn’t authorized to discuss the matter.

“The only reason I see the yields rising today is this news,” Jorge Dib, portfolio manager at Grau Gestao de Ativos in Sao Paulo, said in a telephone interview. “Yesterday the market wanted to embrace this bet on a 75 basis-point cut, but today it’s stepping back a little.”

Yesterday, the January 2013 yield fell as much as 29 basis points to 10.04 percent, the lowest since June 2007.

Brazilian President Dilma Rousseff last week said that unlike the period immediately following Lehman’s bankruptcy, when the central bank waited four months to begin slashing the benchmark rate, Brazil can’t miss the opportunity provided by the current global slowdown to lower borrowing costs that are the highest in the Group of 20 nations.

Estado Report

The government wants the Selic rate to fall to 9 percent next year, newspaper Estado do S. Paulo reported Oct. 2, citing three government officials that it didn’t identify.

Brazil’s industrial production fell in August for the third time in five months, providing more evidence that Latin America’s biggest economy is losing steam amid the financial crisis.

Output fell 0.2 percent, after a revised 0.3 percent growth in July, the national statistics agency said in a report today. Economists expected a 0.1 percent contraction, according to the median estimate of 39 analysts surveyed by Bloomberg. Production rose 1.8 percent from a year earlier.

-- With assistance from Andre Soliani in Brasilia and Ye Xie in New York. Editors: Brendan Walsh, Richard Richtmyer

To contact the reporters on this story: {Josue Leonel} in Sao Paulo at jleonel@bloomberg.net; {Gabrielle Coppola} in Sao Paulo at gcoppola@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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