Brazil Interest Rate Futures `Exaggerate' Inflation, Credit Agricole Says

The highest yields on Brazilian interest-rate futures contracts in 13 months suggest traders are “exaggerating” the inflation outlook in Latin America’s biggest economy, Credit Agricole SA said.

The yield on the contract due January 2011, the most active in Sao Paulo trading, touched 10.76 percent yesterday, the highest since March 2009, after a weekly central bank survey indicated policy makers will need to boost the benchmark interest rate higher and faster than initially expected by analysts as the inflation outlook worsens. The yield was 10.74 percent today at 8:24 a.m. New York time.

“There’s desperation regarding the inflation outlook,” said Vladimir Caramaschi, who helps manage 2 billion reais ($1.14 billion) in assets as the Sao Paulo-based chief strategist at the Brazilian unit of Credit Agricole, France’s largest bank by branches. “Inflation will stay a bit high, but the central bank doesn’t need to come out with its guns blazing. They can buy some time and watch what happens.”

Caramaschi predicts the central bank will raise benchmark borrowing costs by 0.5 percentage point at its next meeting on April 28. That’s less than the 0.69-percentage point increase indicated by interest-rate futures contracts, according to data compiled by Bloomberg. Yields on the contracts have surged 0.38 percentage point since March 30 on speculation the central bank will boost interest rates from a record low of 8.75 percent for the first time since September 2008.

Economists have increased their 2010 inflation estimate in each of the past 15 weeks to 5.32 percent, according to the median forecast in the weekly central bank survey of about 100 economists published yesterday. The central bank’s target is 4.5 percent.

‘Gradually’

An inflation rate between 5 percent and 5.5 percent would still allow the central bank to raise rates “gradually,” Caramaschi said.

Yields on futures contracts may keep rising if the central bank lifts the so-called Selic rate by less than 0.75 percentage point next week, said Jose Francisco de Lima Goncalves, chief economist at Banco Fator SA.

“If there’s a perception that the central bank fell behind the curve or wasn’t aggressive enough, the yields may go up,” Goncalves said in a telephone interview from Sao Paulo.

The central bank survey showed economists expect the central bank to lift the benchmark rate to 11.50 percent by year-end, compared with an 11.25 percent forecast a week earlier.

Consumer prices rose 0.48 percent in the month through mid- April, from 0.55 percent in the previous month, the government’s statistics agency said today. Economists in a Bloomberg survey expected an advance of 0.47 percent.

To contact the reporter on this story: Camila Fontana in Sao Paulo at cfontana@bloomberg.net

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