Brazil Central Bank Signals End of Interest Rate Increases; Yields Decline

Brazil’s central bank said interest rates are adequate to ensure that inflation will remain in line with targets, signaling policy makers won’t raise borrowing costs again this year.

Policy makers voted unanimously to leave the Selic rate at 10.75 percent on Sept. 1, matching the median forecast of analysts surveyed by Bloomberg. The decision came after increases at the bank’s three previous meetings from a record low 8.75 percent in March.

Traders tempered bets that the bank will have to resume rate increases early next year to keep prices in check after annual inflation in August fell below target for the first time in 2010. Policy makers said in the minutes of their Aug. 31- Sept. 1 meeting that the “more pessimistic” view about what level of interest rate will be needed to stem inflation is likely to be at odds with the economy’s “fundamentals.”

“The minutes were very reassuring in relation to inflation and signal rates won’t change for the rest of the year,” Flavio Serrano, senior economist at Banco Espirito Santo de Investmento, said. “The bank said the impact of this year’s rate increases were bigger than what people imagine.”

The yields on 12 of 13 interest rate future contracts trading on Sao Paulo’s BM&F commodity and futures exchange declined.

Since last week’s decision to end rate increases, the government today announced that annual inflation fell to an eight-month low in August of 4.49 percent, down from 4.6 percent in July. Policy makers last week said that they see inflation around their target of 4.5 percent in 2011 in both their reference and market scenarios.

‘Dovish’

Still, economists expect inflation to quicken to 5.03 percent in the 12 months ahead, before slowing to 4.85 percent next year, according to the median estimate in a Sept. 3 central bank survey of about 100 economists.

The yield on interest rate future contracts due in January 2012, the most traded today, fell seven basis points to 11.29 percent at 9:18 a.m. New York time.

The minutes signal that the bank’s “basic scenario” is for no further rate increases in 2011, said Zeina Latif, senior economist for Latin America at RBS Securities Inc. in Sao Paulo.

“It’s very dovish indeed,” Latif said. “Markets will react favorably, but I’m not expecting a huge rally.”

Gross domestic product grew 1.2 percent in the second quarter over the three previous months, more than the median forecast of 0.7 percent in a Bloomberg survey of 41 analysts.

GDP jumped 8.8 percent from a year ago, less than the 9 percent expansion in the first quarter that was the fastest in 15 years.

Central bank President Henrique Meirelles said after the GDP report that he was “comfortable” with the pace of expansion and forecast the economy will further slow in the second half of the year.

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

• Tweet
• More
  • Business Exchange
  • Buzz up!
  • Digg
• Print
• Email