Bloomberg News

Brazil Rate Futures Rise After Central Bank Keeps Pace of Cuts

October 20, 2011

Oct. 20 (Bloomberg) -- Yields on most Brazilian interest- rate futures contracts rose after the central bank quelled speculation it would accelerate the pace of cuts.

Yields on the futures contract due in January 2013 rose six basis points, or 0.06 percentage point, to 10.5 percent. The real fell 0.4 percent to 1.7810 per dollar, from 1.7740 yesterday.

Brazil’s central bank, led by President Alexandre Tombini, voted unanimously yesterday to reduce the benchmark Selic rate to 11.5 percent from 12 percent as economic growth slows. Policy makers said in a statement that a “moderate adjustment” in the rate “is consistent” with the goal of bringing inflation to target by 2012. In the quarterly inflation report last month, policy makers used the phrase “moderate adjustments,” a plural, when outlining its strategy.

The statement didn’t include “any message signaling an acceleration of rate cuts,” Carlos Thadeu de Freitas Gomes Filho, chief economist at Franklin Templeton Investments in Sao Paulo, said in a telephone interview. “It was a hawkish message.”

The decision was correctly forecast by 61 of 68 analysts surveyed by Bloomberg. Five analysts forecast a 0.75-point reduction, and two expected a full-point cut.

Economists expected two more rate cuts of 50 basis points to 10.5 percent by the end of 2012, according to a central bank survey released Oct. 17.

Inflation

Brazil’s inflation rate fell for the first time in 14 months in mid-October, the national statistics agency said today.

Consumer prices, as measured by the IPCA-15 index, rose 7.12 percent in mid-October from a year earlier, after increasing 7.33 percent the 12 months through mid-September, the fastest pace in six years. Brazil targets inflation of 4.5 percent, plus or minus two percentage points.

“The moderation of inflation at the margin is welcoming news,” Alberto Ramos, a senior Latin America economist at Goldman Sachs Group Inc. in New York, wrote in a research note to clients. “However, driving inflation back to the 4.5 percent inflation target midpoint may be a slow process given inertia and still visible inflationary pressures.”

Economists at Banco Itau BBA SA, Latin America’s largest bank, maintained their call that policy makers will lower the benchmark interest rate to 9 percent next year as economic growth slows further.

“Upcoming economic activity data will reinforce the scenario of more intense deceleration in growth, which could drive the central bank to speed up the pace of adjustments in the benchmark rate,” economists including Mauricio Oreng wrote in a research note today.

The economic activity index, a proxy for gross domestic product, shrank 0.53 percent in August, its biggest decline since the global financial crisis of 2008, the central bank reported on Oct. 13.

--With assistance from Ye Xie in New York. Editor: Marie-France Han

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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