(Updates to add Mantega comment in eighth paragraph.)
Nov. 25 (Bloomberg) -- Central bank President Alexandre Tombini reiterated that Brazil is justified in making “moderate” interest rate cuts, given that the world economy has deteriorated in line with his forecasts. Yields rose.
The “substantial and generalized” worsening in the international outlook will affect Brazil’s economic growth and inflation, Tombini said at an event in Sao Paulo.
“This important and significant deterioration has impact on the dynamics of economic activity and inflation, through different transmission channels, justifying the implementation of moderate adjustments to the benchmark interest rate,” Tombini said.
Traders pared bets that the central bank will cut borrowing costs by 75 basis points, or 0.75 percentage point at its policy meeting next week. Tombini’s use of the word “moderate” echoes the language he used to describe his previous two cuts of 50 basis points each. The yield on the interest-rate futures contract due in January 2012 rose 4.8 basis points, or 0.048 percentage point, to 10.906 percent, at 9.26 a.m. Brasilia time. The real weakened 0.6 percent to 1.9088 per dollar.
Tombini said that the downturn in the global economy has not yet led to an “extreme event” or a “rupture.” The central bank estimates that the current turmoil in Europe and elsewhere will have one quarter of the impact on Brazil of the 2008 crisis that followed the bankruptcy of Lehman Brothers Holdings Inc., according to the minutes of the last policy meeting.
Yields on most Brazilian interest-rate futures contracts plunged yesterday after President Dilma Rousseff said the country has room to use monetary policy to shore up economic growth. Traders are wagering that Tombini will cut the benchmark Selic rate by as much as 200 basis points by April.
The central bank began slashing borrowing costs in August to protect Brazil from global economic turmoil. More than $4 trillion has been wiped off world stock markets this month, as yields on Italian and Spanish sovereign debt rose to Euro-era highs. German bunds fell this week, sending yields above those on 10-year UK government bonds for the first time since March 2009, as European debt turmoil spread.
Brazil will continue to take measures to stimulate domestic consumption and maintain economic growth in the face of the international crisis, as inflation remains “well-behaved,” Finance Minister Guido Mantega said to reporters in Sao Paulo today.
Annual inflation slowed for a second straight month in mid- November, to 6.69 percent. Brazil targets inflation of 4.5 percent, plus or minus two percentage points. Inflation has exceeded the upper limit of the target range for the last seven months.
The central bank this month unwound most of the credit curbs that it imposed last December on auto loans, personal loans and payroll loans.
--With assistance from Andre Soliani in Brasilia. Editors: Jonathan Roeder, Harry Maurer
To contact the reporters on this story: Matthew Bristow at firstname.lastname@example.org Felipe Frisch in Sao Paulo at email@example.com
To contact the editor responsible for this story: Joshua Goodman at firstname.lastname@example.org.