Bloomberg News

Brazil Interest-Rate Futures Yields Fall on Retail Sales Decline

October 11, 2011

Oct. 11 (Bloomberg) -- Yields on Brazilian interest-rate futures contracts fell as the biggest drop in retail sales since March 2010 added to signs that policy makers will keep lowering interest rates to bolster economic growth.

Yields on the contracts due in January 2013 fell three basis points, or 0.03 percentage point, to 10.46 percent. Trading in futures contracts suggests traders are betting the central bank will lower the benchmark interest rate at least 50 basis points from 12 percent at its Oct. 19 policy meeting, according to data compiled by Bloomberg.

August retail sales declined 0.4 percent, lower than the median forecast of a 0.1 percent decline in a Bloomberg survey of 34 economists and compared with a revised increase of 1.2 percent in July. The central bank unexpectedly cut the benchmark interest rate a half percentage point on Aug. 31 on concern the slowing global economy would crimp growth in Brazil.

“Domestic consumption is indeed decelerating,” said Zeina Latif, a senior economist with RBS Securities Inc. in Sao Paulo. “Today’s data helps vindicate the central bank’s move in August. There are some chances for the central bank to accelerate the pace of interest rate cuts.”

The real fell 0.7 percent to 1.7759 per dollar, from 1.7632 yesterday. It has gained 5.8 percent this month, after losing 15.4 percent in September.

Policy makers in Indonesia unexpectedly cut the country’s benchmark interest rate by a quarter of a percentage point today to 6.5 percent, joining a growing number of central banks in lowering borrowing costs amid the deepening European debt crisis. Central banks in Israel and Turkey have cut rates since August.

Inflation

Credit growth and lower unemployment had encouraged Brazilians to buy cars and furniture, helping the annual inflation rate rise to a six-year high of 7.31 percent. The drop in retail sales is consistent with the contraction in the manufacturing industries, pointing to weaker economic growth in coming months, according to Latif.

Industrial output contracted in August for the third time in five months, while business confidence in the third quarter fell to its lowest level in more than two years.

Retail sales “should continue to be relatively weak over the next few months,” as a weaker currency erodes demand for imports and “global uncertainties” dampen consumer confidence, Tony Volpon, a Latin America strategist at Nomura Securities Inc. in New York, wrote in a research note today.

“Slower consumer demand should provide another reason for the central bank to continue its rate-cutting course,” Volpon wrote.

‘Systemic Dimension’

Central bank President Alexandre Tombini last week said that “moderate” cuts in borrowing costs will help shield the economy from the European debt crisis, without compromising the inflation target of 4.5 percent in 2012.

In Brussels, European Central Bank President Jean-Claude Trichet told lawmakers today that the debt crisis in the region has “reached a systemic dimension.”

“The external environment is deteriorating and that’s helping to bring down the yields,” said Newton Rosa, an economist with Sul America Investimentos in Sao Paulo.

--Editors: Marie-France Han, Glenn J. Kalinoski

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net

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


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