March 9 (Bloomberg) -- Brazilian interest-rate cuts are helping the real recover from its worst year since 2002.

The real, which tumbled 23 percent last year, climbed 3.6 percent to 2.3861 per dollar over the past three months, the second-biggest gain among the 16 most-traded currencies after the Swiss Franc. The advance was sparked in part by speculation the central bank’s bigger-than-forecast interest-rate cut Jan. 21 would help shore up growth and lure investment, according to Maua Investimentos Ltda., a Sao Paulo-based hedge fund set up by former central bank director Luiz Fernando Figueiredo.

Policy makers will reduce the benchmark overnight rate by another 1 percentage point to 11.75 percent after concluding a two-day meeting on March 11, according to 24 of the 46 economists surveyed by Bloomberg. Economists from RBC Capital Markets and Banco Fibra SA reduced their forecasts March 6 to as low as 10.75 percent after industrial output fell the most on record.

“Aggressive interest-rate cuts in this environment will strengthen the currency, not weaken it,” Caio Megale, chief economist at Maua, said in a telephone interview. He predicts the real will advance to as strong as 2.2 per dollar this year.

‘Attractive Place’

Central bankers lowered the so-called Selic rate by one point from a two-year high of 13.75 percent on Jan. 21. The reduction, the first in 16 months, was bigger than that forecast by most economists surveyed by Bloomberg. The real jumped as much as 1 percent the day after the cut.

Brazil is an “attractive place to invest” because of the scope for further interest-rate cuts, Megale said. “It’s one of the few countries with prospects for growth.”

Latin America’s largest economy will expand 1.2 percent this year, according to the median forecast in a central bank survey of about 100 economists published today. That compares with forecasts for a 2 percent contraction in the U.S. and 2.2 percent in the euro zone, according to Bloomberg data.

Central bank President Henrique Meirelles can keep lowering borrowing costs without worrying that investors will sell local fixed-income assets because developed countries are cutting rates faster, said Emilio Garofalo Filho, a former central bank director who now works in Sao Paulo as a foreign exchange and trade consultant.

‘Have Fun’

U.S. policy makers reduced the benchmark interest rate to as low as zero in December from 4.25 percent a year earlier in a bid to spur lending and pull the economy out of recession. The European Central Bank cut its rate to 1.5 percent from 4 percent a year ago. Further reductions by Banco Central do Brasil would bring the rate differential “with the rest of the world back to the same level that it was six months ago,” Garofalo said.

“The central bank can have fun,” he said. “Nobody will take money out of Brazil because interest rates were lowered.”

Garofalo said the real may advance to as strong as 2.2 per dollar this year. Analysts surveyed by Bloomberg forecast the Brazilian currency will trade at 2.27 per dollar in December, according to the median forecast of 22 institutions.

The following is a list of events in Brazil this week:

Event Date Forecast FIPE CPI - Weekly March 10 0.26% GDP (IBGE) - 4Q QoQ March 10 -2.3% FGV Preview Inflation March 11 -0.09% IBGE Inflation IPCA March 11 0.54% IBGE Inflation INPC March 11 Benchmark Target Rate March 11 11.75% Retail Sales YoY March 13 2.5%

To contact the reporter on this story: Renato Andrade in Sao Paulo randrade11@bloomberg.net

Last Updated: March 9, 2009 18:11 EDT