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Bloomberg News

Brazil Rate Futures Fall on Lower Inflation Forecast; Real Sinks

November 01, 2011

Oct. 31 (Bloomberg) -- Yields on Brazilian interest-rate futures contracts declined on speculation policy makers will keep reducing borrowing costs after economists cut their inflation forecast. The real tumbled the most in one month.

Yields on the interest-rate futures contract due in January 2013, the most actively traded today in Sao Paulo, fell five basis points, or 0.05 percentage point, to 10.29 percent. The real weakened 2.5 percent to 1.7157 per dollar, from 1.6721 on Oct. 28.

Consumer prices will increase 5.59 percent next year, according to the median forecast in an Oct. 28 central bank survey of about 100 economists published today. That’s down from a forecast of 5.60 percent the previous week. Signs of slowing inflation and concern the European debt crisis will weaken global growth are fueling the drop in yields, said Ures Folchini, head of fixed-income at Banco West LB do Brasil SA.

“It seems that the inflation fear has passed,” he said in a telephone interview from Sao Paulo. If a report on Brazil’s industrial production tomorrow shows a decline, “we could have a bigger cut at the next Copom meeting or a longer cycle of cuts,” he said.

September industrial production probably shrank 1.2 percent from the prior month, according to the median estimate of 37 economists surveyed by Bloomberg. It fell 0.2 percent in August, more than the 0.1 percent contraction economists forecast.

Rate Meetings

Policy makers reduced the benchmark Selic rate to 11.5 percent from 12 percent this month, saying it would protect Brazil from a slowdown in the world economy without stoking inflation. Economists expect policy makers to lower borrowing costs a further half-point next month, and to 10.50 percent by the end of 2012, according to the central bank survey.

Consumer prices, as measured by the IPCA index, are forecast to rise 6.5 percent this year, according to the central bank survey, unchanged from the previous week.

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

The real declined as Italian and Spanish bonds fell and stocks retreated from a three-month high on concern European leaders will struggle to raise funds to contain the region’s debt crisis. Commodities fell, with the Standard & Poor’s GSCI Spot Index dropping 0.7 percent.

“The market still isn’t calm,” Roberto Sevalli, director at JMalucelli Investimentos in Curitiba, Brazil, said in a telephone interview. “I don’t see this crisis in Europe being resolved so soon.”

--With assistance from Matthew Bristow in Brasilia and Ye Xie in New York. Editors: Richard Richtmyer, Brendan Walsh

To contact the reporters on this story: Josue Leonel in Sao Paulo at; Gabrielle Coppola in New York at

To contact the editor responsible for this story: David Papadopoulos at

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