Bloomberg News

Moderate Brazil Rate Cuts Fit 2012 CPI Goal, Tombini Says

October 06, 2011

(Updates with analyst comment in fourth paragraph.)

Oct. 6 (Bloomberg) -- Brazil’s central bank President Alexandre Tombini said “moderate” cuts in interest rates will help shield the economy from the European debt crisis and won’t prevent inflation from slowing to 4.5 percent next year.

“Looking ahead, given current conditions, moderate adjustments in interest rates are consistent with inflation converging to the center of its target in December 2012,” Tombini said at an event in Brasilia.

Traders pared bets today that the central bank will accelerate the pace of cuts after slashing the benchmark rate by 50 basis points to 12 percent on Aug. 31. The yield on the contract maturing in January 2013, the most traded in Sao Paulo today, rose 14 basis points to 10.36 percent at 5:01 p.m. New York time.

Tombini’s use of the word “moderate” points to a rate cut of 50 basis points, rather than the 75 basis-point cut that some traders are betting on, said Andre Perfeito, an economist with Gradual Investimentos in Sao Paulo.

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

‘Getting Worse’

“The bets on 75 basis points or even 100 basis points are driven by two main reasons: the belief that the situation in Europe is getting worse, and this talk about the monetary stance that Dilma Rousseff wanted next year,” Perfeito said.

Consumer prices rose 7.33 percent in the year through mid- September, exceeding the 6.5 percent upper limit of the bank’s target range for a fifth straight month. Tombini pledged to slow inflation to 4.5 percent by the end of next year.

Jankiel Santos, chief economist at Espirito Santo Investment Bank, said there is no case for speeding up the pace of rate cuts without evidence that the Brazilian economy is really being hit by the problems in Europe.

Brazil’s economy showed clear signs of slowing in August and will grow 3.5 percent this year, Tombini said. Given slower domestic growth and the impact of the global crisis, policy makers decided to cut rates in August, he said.

Brazil hasn’t abandoned its policy of accumulating foreign reserves, and the central bank will resume its dollar purchases when market conditions permit, Tombini said. He added that the central bank is ready to intervene in currency markets when movements in the real are not consistent with the dollar’s global trend.

Brazil has $349 billion in international reserves, up 21 percent from the start of the year.

The real appreciated 2.8 percent to 1.7811 per U.S. dollar.

--Editors: Harry Maurer, Robert Jameson

To contact the reporters on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net Matthew Bristow at mbristow5@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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