Bloomberg News

Brazil Rate Futures Fall as Economists Lower Inflation Forecast

October 24, 2011

Oct. 24 (Bloomberg) -- Yields on most Brazilian interest- rate futures contracts fell after economists covering the economy cut their 2012 inflation forecast for the first time in eight weeks, prompting traders to step up bets on reduced borrowing costs.

Yields on the futures contract due in January 2013 dropped seven basis points, or 0.07 percentage point, to 10.41 percent.

Consumer prices will increase 5.60 percent next year, according to the median forecast in an Oct. 21 central bank survey of about 100 economists published today, compared with a forecast of 5.61 percent the previous week. Consumer prices, as measured by the IPCA index, will rise 6.50 percent this year, from a week-earlier forecast of 6.52 percent, the survey showed.

“The Focus survey and the last IPCA-15 numbers gave the impression that inflation isn’t going to explode,” Ures Folchini, head of fixed-income at Banco West LB do Brasil SA, said in a telephone interview from Sao Paulo. “The IPCA-15 helped to improve expectations.”

Annual inflation slowed in mid-October for the first time in 14 months. Consumer prices, as measured by the IPCA-15 index, climbed 7.12 percent in mid-October from a year earlier, compared with 7.33 percent the previous month.

Economists trimmed their 2011 inflation forecast back to within the central bank’s inflation target of 4.5 percent, plus or minus two percentage points.

Selic Rate

The central bank last week cut its benchmark Selic rate to 11.5 percent from 12 percent, saying this would protect Brazil from a more “restrictive” global economy without compromising the inflation target. Economists expect the bank to lower borrowing costs a further 0.5 percentage point at their November policy meeting, and to 10.5 percent by the end of 2012, the survey found, unchanged from the previous week’s forecasts.

The real rose 1.4 percent to 1.7506 per dollar, from 1.7755 on Oct. 21.

Euro-area leaders at yesterday’s summit in Brussels ruled out tapping the European Central Bank’s balance sheet to boost the region’s rescue fund, the European Financial Stability Facility, and excluded a forced restructuring of Greece’s debt. The politicians looked at strengthening the International Monetary Fund’s role and outlined plans to aid banks.

“Europe is still the big focus of concern,” Tarcisio Rodrigues, head of currency trading at Banco Paulista SA in Sao Paulo, said in a telephone interview. “The market is sensitive and any negative flow, even a small one, could affect the price of the dollar.”

--With assistance from Matthew Bristow in Brasilia. Editors: Glenn J. Kalinoski, 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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