Bloomberg News

Brazil Futures Yields Fall to Record Low as Tombini Signals Cut

February 03, 2012

Feb. 2 (Bloomberg) -- Yields on Brazilian interest-rate futures contracts fell to a record low after central bank President Alexandre Tombini reiterated that policy makers “have some room” to reduce borrowing costs without stoking inflation.

The yield on the contract due in January 2013 fell five basis points, or 0.05 percentage point, to 9.45 percent. It earlier declined to 9.43 percent. The real gained 0.9 percent to 1.7189 per dollar from 1.7343 yesterday.

Futures traders stepped up bets that borrowing costs will fall below 10 percent this year after Tombini told reporters in Mumbai today that the Brazilian economy has grown below its potential in the last two quarters, giving policy makers “room to reduce rates.” The central bank is pursuing its goal of bringing inflation back to its 4.5 percent target in 2012, Tombini said.

“Whoever still doubted can see that they have really decided to bring interest rates to a single digit,” Mauricio Junqueira, who helps oversee about $300 million at Squanto Investimentos, said by phone from Sao Paulo. Policy makers “are looking for clearer communication, more transparency,” he said.

Yields on interest-rate futures contracts have tumbled 21 basis points since Jan. 26, when the central bank said in the minutes of its Jan. 17-18 meeting there is a “high” probability interest rates will fall to one digit because of significant structural changes in Brazil’s economy, including the expansion of the credit market.

Growth Slowdown

The yield on the contract due in January 2014, the most actively traded today in Sao Paulo, dropped five basis points to 9.88 percent, the lowest since Nov. 30.

“The market is pricing in two cuts,” Junqueira said. “This weighs on the short-term contracts but also in the longer maturities.”

Traders are anticipating the central bank will reduce the Selic rate by 100 basis points to as low was 9.5 percent by May, according to rate futures yields.

Brazil’s economic growth slowed to around 3 percent last year from about 7.5 percent in 2010, Tombini said.

The central bank has cut its benchmark interest rate by 2 percentage points to 10.5 percent since August, even as inflation remains above the mid-point of its target range of 4.5 percent plus or minus two percentage points. Annual inflation, as measured by the mid-month IPCA-15 index, was 6.44 percent as of Jan. 15.

Inflation

The central bank’s expectation for consumer price increases this year is close to 4.7 percent, Tombini said today in Mumbai.

Analysts forecast inflation of 5.28 percent this year, according to a Jan. 27 central bank survey of around 100 economists.

Consumer prices rose 0.66 percent in January, up from a 0.61 percent increase in December, the Foundation Economics Research Institute in Sao Paulo said today. The figure exceeded the 0.64 percent median estimate of 23 analysts surveyed by Bloomberg.

Brazil’s government faces limits on how much it can do to prevent its currency from strengthening, Trade Minister Fernando Pimentel said in an interview yesterday in Port-au-Prince as he accompanied President Dilma Rousseff on a state visit.

The strength of the Brazilian economy is attracting foreign money, Pimentel said. Brazil’s industrial production in December rose 0.9 percent, the fastest pace in seven months.

The Brazilian government sold 5.07 million of the 5.3 million LTN bills offered at an auction today, according to a preliminary statement posted on the central bank’s website.

--With assistance from Anoop Agrawal in Mumbai. Editor: Glenn J. Kalinoski

To contact the reporters on this story: Telma Marotto in Sao Paulo at tmarotto1@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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