Bloomberg News

Brazil Futures Yields Jump as Tombini Signals Limit to Rate Cuts

March 15, 2012

Yields on Brazilian interest-rate futures contracts surged the most in almost three years after the central bank signaled it will refrain from lowering borrowing costs below 9 percent.

The yield on the contract due in January 2013 rose 26 basis points, or 0.26 percentage point, to 8.93 percent as traders scrapped wagers on more aggressive cuts. Yields on the contracts maturing 2016 or longer fell. The real pared its gain to 0.3 percent, closing the day at 1.7983 per U.S. dollar, after the central bank bought dollars in the foreign-exchange market.

Policy makers said they see a “high probability” of interest rates declining to levels just above the record low of 8.75 percent as inflation in Latin America’s biggest economy remains under control, according to minutes of their March 6-7 meeting at which they reduced borrowing costs 75 basis points.

“The minutes reduce a little the fear of those who thought that the central bank was being too aggressive in its cuts,’” Vladimir Caramaschi, the chief strategist at Credit Agricole Brasil, said by phone from Sao Paulo. “The central bank’s biggest critics are now breathing easier.”

Yields on some contracts pared their increases after a government official said policy makers anticipate keeping borrowing costs near the record low for the next 18 months. 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 government official, who asked not to be identified to comply with internal policy.

Rate-Cut ‘Redistribution’

Central bankers led by President Alexandre Tombini stepped up the pace of interest-rate cuts on March 7, reducing the overnight rate to 9.75 percent, to spur growth and curb gains in the real by diminishing the allure of the country’s fixed-income assets. Policy makers have reduced the rate 275 basis points since August.

The bank, in today’s minutes, said its March decision to accelerate the pace of monetary easing reflected “redistribution” of interest rate cuts already planned.

Yields on contracts due in 2017 fell 12 basis points to 10.7 percent on expectations that less aggressive rate cuts will help contain inflation.

Interest-rate futures contracts indicate traders expect the central bank to cut the benchmark rate 75 basis points to 9 percent by July. Yesterday, the contracts showed bets on a reduction to as low as 8.5 percent.

Consumer prices will rise 5.2 percent this year, according to the median forecast in a March 9 central bank survey. After the 75 basis-point cut on March 7, the analysts surveyed raised their inflation forecasts. Analysts now expect inflation to remain above the mid-point of the target until 2017.

The central bank targets of inflation of 4.5 percent, plus or minus two percentage points.

Dollar Auction

Brazil’s real pared gains after Brazil’s central bank said it bought dollars in the spot market at an auction today, three days after the government extended a tax on foreign loans and bonds by local companies to curb the currency’s gains.

Brazil “wants to demonstrate that it won’t just rely on” the tax measures to contain the rally, said Jose Carlos Amado, a currency trader at Renasenca DTVM Ltda in Sao Paulo.

The real is up 3.8 percent this year.

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; Gabrielle Coppola in New York at gcoppola@bloomberg.net

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


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