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Tombini Signals Brazil Interest-Rate Reductions to End at 9%

March 15, 2012

Brazil’s central bank signaled it will lower interest rates to 9 percent, surprising traders who expected deeper cuts after policy makers accelerated the pace of monetary easing last week. Yields on interest-rate futures jumped the most in almost three years.

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 “levels slightly above the historical lows and stabilizing” there. The decision to speed the pace of monetary easing reflected a “redistribution” of rate cuts already planned, the bank said.

The bank’s board, led by President Alexandre Tombini, voted 5-2 last week to cut the Selic (BZSTSETA) rate by 75 basis points to 9.75 percent, bringing it below 10 percent for only the second time on record. Two dissenting members voted to lower the rate by a half point for a fifth straight meeting. In 2009, the Selic fell to a record low 8.75 percent.

“The market got ahead of itself, betting on an 8.5 percent” Selic by July, said Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA in Sao Paulo. “Even though the bank accelerated the easing pace, the total cycle of rate cuts hasn’t changed.”

Yields Jump

The yield on the interest rate futures contract maturing in January 2013 jumped 27 basis points to 8.94 percent at 12:31 p.m. Brasilia time, as traders pared bets on deeper rate cuts. That was the biggest single-day gain since a 32 basis point jump on June 9, 2009. The real reversed earlier declines to gain 0.1 percent to 1.8028 per U.S. dollar. The currency has weakened 4.8 percent this month, the most of 16 major currencies tracked by Bloomberg.

“They are telling you that they are going to 9, and that they are going to stay there for a while,” said Tony Volpon of Nomura Securities, one of just two economists who correctly forecast this month’s rate cut in a Bloomberg survey of 62 analysts. “They see 9 percent as being the steady state place that they can stay at.”

The clear signaling in today’s minutes represents a refinement of the bank’s use of “forward guidance” to give investors a better idea of the path of interest rates, said Volpon, chief emerging markets economist for the Americas at Nomura, speaking in a phone interview from New York. In January, the bank told investors that rates would fall to a “single digit.”

Volpon raised his year-end 2012 interest rate forecast to 9 percent from 8.5 percent after the minutes were published.

Gasoline Prices

The central bank’s forecasting models showed that the outlook for 2012 inflation improved since the bank’s January policy meeting, while the 2013 outlook deteriorated, with consumer price increases above the 4.5 percent midpoint of the target range in its so-called “market” and “reference” scenarios. Policy makers maintained their forecast that gasoline prices will remain unchanged this year.

Tombini began lowering the benchmark rate in half-point increments from 12.5 percent in August, saying that reductions in borrowing costs would shield Brazil from the deterioration in the world economy.

The risks of a banking crisis have receded thanks to the European Central Bank’s injections of liquidity, though the “fragile” global economy will continue to exert a “disinflationary bias” on Brazil, the minutes said.

“The process of moderation in the Brazilian economy already under way in the first half of last year, was accentuated by the fragility of the global economy,” the minutes said.

Slower Inflation

Inflation as measured by the benchmark IPCA index slowed for a fifth straight month to 5.84 percent in February, the first time it had fallen below 6 percent since January 2011. Prices rose 6.5 percent last year. Policy makers expect the trend to continue, helped by slower growth.

Even with inflation cooling, economists are doubtful that Tombini can fulfill his pledge to hit the 4.5 percent target this year, with unemployment close to a record low and credit growth of 18 percent fueling consumer demand.

Consumer prices will rise 5.27 percent this year, according to the median forecast in a March 9 central bank survey. After the rate cut, the analysts surveyed raised their inflation forecasts. Analysts now expect inflation to remain above the midpoint of the target until 2017.

‘Favorable’ Outlook

The outlook for the Brazilian economy remains “favorable” due to credit growth, high levels of consumer confidence and wage increases driven by “historically low” unemployment, even though all of these factors have moderated, the minutes said.

The International Monetary Fund expects Brazil to grow 3 percent this year, slower than Russia, India and China, the other BRIC nations.

Industrial production in January contracted 2.1 percent from a month earlier, its biggest fall in three years, while the economy as a whole had its second-worst performance since 2003 last year.

Gross domestic product expanded 2.7 percent in 2011, less than that of Brazil’s neighbors and below Germany’s 3 percent growth amid the euro debt crisis.

To contact the reporter on this story: Matthew Bristow in Brasilia at; Andre Soliani in Brasilia at

To contact the editor responsible for this story: Joshua Goodman at

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