Bloomberg News

Brazil Said to Plan Further Half-Point Rate Reductions

July 04, 2012

Brazil plans to maintain the pace of interest rate reductions at half-point intervals as the economy recovers more slowly than expected and Europe’s debt crisis remains a concern, a government official familiar with the bank’s deliberations said.

While the situation in Europe has stabilized in recent days, it and the U.S.’s fiscal situation are hurting the confidence of investors and consumers in Brazil, said the official, who spoke on condition of anonymity because he’s not authorized to discuss monetary policy. Brazilian industrial output fell for a third straight month in May, a report showed yesterday.

Brazil’s central bank, which next decides rates on July 11, cut its benchmark Selic rate to a record low 8.5 percent in May. It was the fifth time in seven meetings that the central bank reduced borrowing costs by 50 basis points. Policy makers said in a quarterly inflation report last week that any future monetary easing would be carried out with “parsimony,” repeating language used in previous statements that analysts said signals rate reductions of a half point.

The yield on interest rate future contracts maturing in January 2014 rose four basis points to 7.86 percent at 2:44 p.m. local time. The real extended declines, falling as much as 0.9 percent to 2.0345 reais per dollar.

Reserve Requirements

Traders are betting that the bank will lower the Selic another 50 basis points as its meeting next week, and at least 25 basis points in August, according to Bloomberg estimates based on interest-rate futures contracts.

The central bank could resume dollar purchases in the foreign exchange market and lower banks’ reserve requirements to ensure liquidity if needed, the official said.

Brazil’s real gained 2.12 percent since June 27, after logging the biggest losses against the U.S. dollar among major currencies tracked by Bloomberg in the previous three months.

Earlier today, Finance Minister Guido Mantega said that the government may keep taking measure to maintain a weak real.

The world’s sixth-largest economy grew slower than the government expected in the first quarter and is facing a difficult moment though growth will accelerate in the second half of the year, the official said.

The central bank in an e-mail declined to comment.

To contact the reporter on this story: Raymond Colitt in Brasilia at rcolitt@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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