Bloomberg News

Brazil Anticipates Keeping Key Rate at Near Low Over 18 Months

March 15, 2012

Brazil anticipates keeping its benchmark borrowing cost near a record low for the next 18 months, a government official said, challenging higher market interest rates based on above-target inflation in 2013.

Policy makers said yesterday that inflation will slow to around their 4.5 percent target in 2012, giving the central bank room to reduce the Selic (BZSTSETA) rate to “slightly above” the historical low of 8.75 percent.

Analysts expect Brazil’s consumer prices to rise 5.3 percent in 2012 and 5.5 percent in 2013, according to the median estimates in a March 9 central bank survey. That has prompted traders to bet bank President Alexandre Tombini will have to reverse course early in 2013 after reducing the rate to 9 percent by May, interest-rate futures show.

Slower global economic growth and a delay in a definitive solution for the European debt crisis mean that there is no reason to expect inflation will accelerate in Brazil, said the official yesterday, who asked not to be identified to comply with internal policy. As a result, the government anticipates interest rates may stay close to record low levels over the next 18 months, the official said.

Futures Yields

Yields on the interest rate futures contract maturing in January 2016 declined yesterday, as traders pared bets the central bank will resume rate increases early next year. The contract, after rising as much as four basis points in earlier trading, fell seven basis points, or 0.07 percentage point, to 10.52 percent.

“Markets will only buy this view if economic growth doesn’t accelerate and inflation remains tame,” Solange Srour, chief economist at BNY Mellon ARX Investimentos, said by phone from Rio de Janeiro. “This discourse won’t stand if inflation quickens.”

The outlook for Brazil’s interest rate may change if consumer prices rise faster than current projections by the government, the official said, adding that the administration of President Dilma Rousseff won’t tolerate more inflation.

“It doesn’t make sense to keep the interest rate at that level for such a period of time,” Jankiel Santos, chief economist at Espirito Santo Investment Bank, said in a phone interview from Sao Paulo. “Keeping it at 9 percent for that long a period is going to bring more and more inflation.”

‘High Probability’

Policy makers, in the minutes to their March 6-7 meeting, said that with inflation in Latin America’s biggest economy under control, they see a “high probability” of the benchmark rate falling to slightly above the historical low.

Last week, the central bank unexpectedly lowered the benchmark interest rate to 9.75 percent, bringing the Selic rate to a single digit for only the second time since inflation targeting was adopted in 1999. The decision, which was anticipated by 2 of 62 analysts surveyed by Bloomberg, split the board for a second time in its last five meetings, with two of the seven members arguing for a fifth straight half-point cut.

The decision to speed the pace of monetary easing reflected a “redistribution” of rate cuts already planned, the bank said.

Policy makers have chosen to set interest rates at a lower level than analysts expected in three of the 10 board meetings presided over by Tombini. The second time was in August, when the board decided to cut the benchmark interest rate by half a percentage point, after raising it in each of the previous five meetings.

Reviving Growth

Rousseff, in an interview published March 12 on the blog of independent journalist Luis Nassif, said the central bank was cutting rates with the dual goal of reviving growth and narrowing the interest-rate gap between Brazil and rich nations that prompt investors to bring dollars into the country.

Rousseff has pledged to take all needed measures to shield Brazil from what she called a “monetary tsunami” unleashed by the U.S. and Europe.

To stem a rally in the real, the government increased taxes on foreign loans three times in March, leading the currency to weaken 4.5 percent, the most among the 16 most-traded currencies tracked by Bloomberg. In trading yesterday, the real rose 0.3 percent to 1.7983 per U.S. dollar.

Savings Accounts

A rate cut to 9 percent could push yields on local bonds below government-mandated returns on savings accounts, which pay 7.3 percent per year, after taking into account fees collected by asset managers and taxes.

That distortion, if allowed to persist, could prompt investors to shift money into tax-free savings accounts, making it more difficult for companies and the government to sell bonds domestically.

The central bank has broadened its mandate beyond controlling inflation to incorporate economic growth and the exchange rate, Marcelo Salomon, co-head of Latin American economics at Barclays Plc, said in an interview from New York.

The central bank is likely to resort to credit curbs in a bid to slow inflation before it decides to resume interest rate increases in the first quarter of next year, Salomon said.

To contact the reporters on this story: Adriana Arai in Sao Paulo at; Andre Soliani in Brasilia at

To contact the editor responsible for this story: Joshua Goodman in Rio de Janeiro at

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