Brazil Rate Future Yields Fall as China Growth Slows; Real Gains

Yields on most Brazilian interest- rate futures contracts fell as slowing economic growth in China, the Latin American country’s largest trading partner, prompted traders to step up bets on an interest-rate cut tomorrow. The real gained.

Yields on the futures contract due January 2013 fell eight basis points, or 0.08 percentage point, to 10.47 percent. Futures contracts show traders are anticipating the central bank will lower the benchmark interest rate a half percentage point from 12 percent at their two-day policy meeting ending tomorrow, according to data compiled by Bloomberg.

China, the world’s second-largest economy, reported the slowest gross domestic product growth in two years today. The real rose after the Guardian reported that Germany and France will boost the European rescue fund to 2 trillion euros ($2.75 trillion) to resolve the region’s sovereign debt crisis.

“The central bank has all the arguments to cut the interest rate at a faster pace, even though maintaining the 50 basis point cut would be better for inflation expectations,” Andre Perfeito, the chief-economist at Gradual Investimentos, said in an interview in Sao Paulo.

The real rose 1.1 percent to 1.7543 per U.S. dollar, from 1.7741 yesterday. It has gained 7.1 percent this month, the most among 25 emerging market currencies tracked by Bloomberg.

This weekend’s debt-crisis summit may back the expansion of the rescue fund, the U.K.-based Guardian reported, citing unnamed European Union diplomats. Steffen Seibert, German Chancellor Angela Merkel’s chief spokesman, declined to comment.

The real tumbled 2.3 percent yesterday as speculation that there won’t be any quick fix to the European debt crisis prompted investors to sell emerging-market assets.

‘International Scenario’

“The international scenario is not as bad today,” Ures Folchini, head of fixed-income at Banco WestLB do Brasil SA, said in a telephone interview.

Brazilian policy makers cut the benchmark rate a half percentage point from 12.5 percent on Aug. 31, after raising it five times this year to curb inflation. The decision surprised all 62 economists surveyed by Bloomberg, who had expected no change.

Fifty-nine of 66 economists surveyed by Bloomberg expect policy makers to lower the benchmark interest rate 50 basis points, or 0.5 percentage point, tomorrow. Five economists surveyed expect a 75-basis-point cut to 11.25 percent. Zeina Latif at RBS Securities Inc. and Alfredo Coutino at Moody’s Economy predict a reduction to 11 percent.

Investigation

The central bank denied that anyone could have prior knowledge of its interest-rate decisions after newspapers reported that the securities regulator is investigating “atypical” movements in interest-rate futures contracts ahead of the surprise Aug. 31 rate cut.

The central bank said in a statement today that it’s “impossible” to learn of decisions in advance because they are taken in a closed meeting by the board and then immediately communicated to the public.

Rio de Janeiro-based O Globo newspaper reported Oct. 15, citing a person it didn’t identify, that the regulator is investigating because “two or three” unidentified banks changed their position to bets that policy makers would cut rates in the days prior to the meeting. Other newspapers, including O Estado de S.Paulo, also said an investigation is in progress.

The regulator declined to comment in an e-mailed statement.

Jobs Growth

Brazil’s annual inflation rate rose to 7.31 percent last month, the highest in six years. Central bank President Alexandre Tombini aims to lower inflation to 4.5 percent by the end of next year, a target that economists say he will fail to meet.

Consumer prices will increase 5.61 percent next year, according to the median forecast in an Oct. 14 central bank survey of about 100 economists published yesterday, up from a forecast of 5.59 percent the previous week. Economists also raised their 2013 inflation forecast to 4.9 percent from 4.85 percent.

Brazil’s economy created 209,078 government-registered jobs in September, after adding 190,446 in August, the Labor Ministry said today in Brasilia. The gain compares with a forecast of 168,625 jobs, according to the median estimate from 10 economists surveyed by Bloomberg.

To contact the reporters on this story: Josue Leonel at jleonel@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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