Bloomberg News

Brazil Rate Futures Yields Fall on Central Bank Policy Outlook

October 26, 2011

Oct. 26 (Bloomberg) -- Yields on Brazil’s interest-rate futures contracts fell on speculation the central bank will keep lowering borrowing costs as economic growth slows.

Yields on the interest-rate futures contract due in January 2013 fell nine basis points, or 0.09 percentage point, to 10.33 percent. The real gained 0.4 percent to 1.7586 per dollar, from 1.7658 yesterday. Futures contracts suggest traders are betting the central bank will cut the benchmark interest rate 100 basis points to 10.5 percent by the end of 2012, according to data compiled by Bloomberg.

Economists in a central bank survey lowered their growth forecast for this year to 3.3 percent on Oct. 21 from 3.42 percent the previous week. Retail sales fell 0.4 percent in August, the biggest drop since March 2010, while the economic activity index shrank in August by the most in three years.

“There is concern that the Brazilian economy is weaker,” Carlos Kawall, chief economist at Banco J. Safra SA, said in a telephone interview from Sao Paulo. “There is the chance that growth in the gross domestic product in the third quarter will be close to zero.”

Policy makers led by bank President Alexandre Tombini reduced the benchmark Selic rate on Oct. 19 to 11.5 percent from 12 percent, saying a worsening global economy calls for a “timely” reaction. Central bankers said “moderate” rate adjustments won’t compromise their goal of bringing down inflation to the country’s 4.5 percent target in 2012. The central bank is scheduled to release the minutes of the meeting tomorrow.

Inflation

Brazil’s biggest challenge is taming inflation that is set to stay above the mid-point of the target range for at least the next two years, the Organization for Economic Co-operation & Development, or OECD, said.

Consumer prices, as measured by the IPCA index, will rise 6.5 percent this year, 6.2 percent in 2012 and 5.1 percent in 2013, the Paris-based organization estimated in a report released today. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

Inflation slowed in mid-October for the first time in 14 months. 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.

Outstanding loans rose 2.1 percent from August to 1.93 trillion reais ($1.1 trillion), after a 1.8 percent increase in August from July, the central bank said in a report today. The credit growth, led by loans from state-controlled banks such as BNDES and Caixa Economica Federal, was the fastest since November.

--With assistance from Matthew Bristow in Brasilia and Alexander Ragir in Rio de Janeiro. Editors: Glenn J. Kalinoski, Richard Richtmyer

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