Bloomberg News

Brazil Signals Continued Moderate Rate Cuts on Robust Demand

December 09, 2011

(Updates to add Goncalves quote in fifth paragraph.)

Dec. 8 (Bloomberg) -- Brazil’s inflation will slow to “around” its target next year, allowing a continuation of moderate interest rate cuts, central bank policy makers said in the minutes of their last meeting.

The monetary authority last week reduced its benchmark interest rate by half a percentage point to 11 percent, the third consecutive cut to the Selic rate from 12.5 percent in August. Economic growth will slow to 3.1 percent this year, according the median estimate in a central bank survey of economists published this week, from 7.5 percent last year.

“Even with a moderate adjustment of the level of basic interest rates, in the central scenario the inflation rate stands around the 2012 target,” the central bank said in the minutes of the Nov. 29-30 board meeting, published today on its website, citing both slower global growth and “robust” domestic demand.

The minutes support expectations the bank will continue with half-percentage-point cuts, said Jose Goncalves, chief economist at Banco Fator in Sao Paulo.

“It consolidates the trajectory of moderate cuts. I continue with three more 50 basis-point cuts in the next three meetings,” Goncalves said.

Inflation Accelerates

Brazil’s IPCA consumer price index quickened to 0.52 percent in November from 0.43 percent in October, prompting traders to reduce bets for a 75 basis-point cut at the central bank’s January policy meeting.

The yields on the interest rate futures contract maturing in January 2013, the most trade in Sao Paulo today, rose seven basis points, or 0.07 percentage point, to 9.81 percent at 10.15 a.m. local time.

Traders are pricing in additional cuts totaling 1.5 percentage points by July, futures show.

President Dilma Rousseff’s administration is trying to reignite growth with a mix of tax cuts, lower borrowing costs and credit stimulus. Gross domestic product shrank for the first time in 10 quarters in the three months ending in September, prompting Finance Minister Guido Mantega to say that the government will continue to take measures to make credit cheaper and foster 5 percent growth next year.

Traders’ Bets

Traders are wagering policy makers will reduce rates by at least 50 basis points, or 0.5 percentage point, in January to protect Latin America’s biggest economy from the financial turmoil that has wiped out more than $6 trillion from world stock markets since the end of July.

The real gained 0.4 percent to 1.7925 per U.S. dollar at 10:49 a.m. Brasilia time.

Gross domestic product contracted 0.04 percent in the third quarter from the previous three months, the national statistics agency said Dec. 6. The contraction, the first since the first quarter of 2009, is equivalent to an annualized decline of 0.17 percent.

Even as growth slows, analysts forecast central bank President Alexandre Tombini will fail to bring inflation back to the target of 4.5 percent next year. Consumer price increases have breached the upper end of the 2.5-to-6.5 percent target range since April.

Slowing industrial production amid falling global demand has been the main brake on economic activity, while a tight labor market has helped sustain Brazil’s domestic consumer demand, which remains robust and will pick up over the next quarters due to rate cuts, the central bank said in the minutes.

Analysts expect consumer prices to rise 6.5 percent this year and 5.5 percent in 2012, according to the median estimate in the central bank survey of economists.

Breakeven rates, the difference between yields on 2015 inflation-linked and fixed rate bonds, show that traders are wagering on average annual inflation of 5.7 percent over the next four years, down from 6.2 percent at the end of September.

--Editors: Harry Maurer, Adriana Arai

To contact the reporters on this story: Raymond Colitt in Brasilia at rcolitt@bloomberg.net; Matthew Bristow in Brasilia at mbristow5@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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