Bloomberg News

Tombini Stands Firm as Bets on Lower Brazil Rates Rock Market

December 06, 2012

Brazil’s central bank is standing by its strategy of keeping the key rate stable for a prolonged period, its President Alexandre Tombini said after traders rocked markets with bets he will resume cutting borrowing costs.

Brazilian swap rates tumbled to a record yesterday after the nation’s biggest bank forecast policy makers will inject more monetary stimulus into the slumping economy early next year. The report by Itau Unibanco Holding SA came out around the same time as the minutes to last week’s policy meeting, in which policy makers reiterated their pledge to keep the Selic rate at a record low 7.25 percent for an extended period.

“The adequate strategy to bring inflation back to target is to keep the stability of the monetary conditions for a sufficiently prolonged period,” Tombini told reporters last night in Brasilia, repeating language used in the statement from the Nov. 28 meeting. “The minutes couldn’t be more up to date.”

Latin America’s largest economy grew 0.6 percent in the third quarter, less than half the pace forecasted by the government and economists surveyed by Bloomberg ahead of last week’s report.

Slower growth hasn’t been enough to tame inflation, which has remained above the government’s 4.5 percent target for more than two years. The pace of consumer price increases accelerated to 5.45 percent in October from 5.28 percent the previous month.

Brazil’s decision last week to leave borrowing costs unchanged ended more than a year of easing that drove down the benchmark rate 5.25 percentage points since August 2011, the most among the Group of 20 nations.

Stimulus Frenzy

Since last week’s disappointing growth report, the government has stepped up efforts to revive the economy. Among other measures it reduced interest rates charged by the state development bank, launched a program to attract private investment to the nation’s overextended ports and extended payroll tax cuts to ailing industries.

While Europe’s debt crisis, a looming fiscal crisis in the U.S. and a slowdown in China continue to weigh on the economy, President Dilma Rousseff isn’t urging policy makers to lower borrowing costs as she was doing earlier this year.

The government sees no need for additional rate cuts to spur growth, a government official said yesterday. The current level of interest rate is adequate given the cuts carried out haven’t yet fully worked their way through the economy, said the official, who discussed the issue this week with Rousseff though asked not to be named because interest rate decisions are taken by the central bank.

Swap rates on the contract due in January 2014 plunged 23 basis points yesterday to 6.87 percent, the biggest drop since May 4.

To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net

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


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