Bloomberg News

Brazil Futures Yields Fall on Inflation, Greece as Real Rises

February 17, 2012

Feb. 16 (Bloomberg) -- Yields on Brazilian interest-rate futures contracts fell to a record low on speculation a delay on Greece’s bailout and slowing domestic inflation will create room for further cuts in borrowing costs.

The yield on the contract due in January 2013 declined five basis points, or 0.05 percentage point, to 9.22 percent at 4:21 p.m. in Sao Paulo. It earlier dropped to 9.19 percent, a record low. The real rose 0.5 percent to 1.7204 per U.S. dollar, from 1.7285 yesterday.

Consumer prices as measured by Brazil’s IPC-S index rose less than economists forecast in the month through yesterday, while a proxy for economic growth slowed in December.

The figures were “surprisingly low,” Luciano Rostagno, chief strategist with Banco WestLB do Brasil SA, said by phone from Sao Paulo. “The price indexes released in Brazil affect the DI curve.”

The real reversed earlier losses after an index showed manufacturing in the Philadelphia region expanded in February at the fastest pace in four months and jobless claims in the U.S. unexpectedly dropped last week to the lowest level in four years. Signs of recovery in the world’s largest economy spurred speculation that investors will swap their low-interest-rate Treasuries for higher-yielding emerging market assets.

Consumer prices in Brazil’s 12 biggest cities rose 0.30 percent over the past month, the Getulio Vargas Foundation said today. The increase was less than the 0.38 percent median estimate of 24 economists surveyed by Bloomberg. Consumer prices in Sao Paulo as measured by the IPC-Fipe rose 0.24 percent in the four weeks through Feb. 14, also below estimates.

The seasonally-adjusted economic activity index rose 0.57 percent in December from November, the central bank said. The measure grew a revised 1.29 percent in November.

Benchmark Rate

Brazil’s central bank has lowered the benchmark interest rate 2 percentage points since August to 10.5 percent. Interest- rate futures contracts showed traders are expecting a further cut to as low as 9 percent by August, according to data compiled by Bloomberg.

The government yesterday announced a plan to cut 55 billion reais ($32 billion) from this year’s budget proposal as part of a strategy to help slow inflation and allow the central bank to reduce borrowing costs.

Lower interest rates will fuel credit expansion, helping the economy grow more than 5 percent in the second half of the year, Finance Minister Guido Mantega told reporters in Brasilia today. Latin America’s largest economy expanded 3.7 percent last year, after growing 7.5 percent in 2010, the fastest pace in more than two decades.

In Europe, creditor countries struggled to reach an agreement over a rescue of Greece, seeking more control over how future aid is spent as the country faces the threat of default over a bond payment due on March 20. Policy makers will discuss a second bailout on Feb. 20.

“With this external scenario getting worse, the central bank can adopt a slightly more dovish policy,” said Italo Lombardi, an economist at Standard Chartered Bank, in an interview from New York.

--With assistance from Ye Xie in New York. Editors: Brendan Walsh, Richard Richtmyer

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; Ney Hayashi in Sao Paulo at ncruz4@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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