Brazil Futures Yields Decline as Central Bank Signals More Cuts

Yields on Brazilian interest-rate futures contracts fell to a one-month low after the central bank signaled it would maintain its pace of interest-rate cuts at a policy meeting yesterday.

The yield on the contract due in January 2013 tumbled nine basis points, or 0.09 percentage point, to 9.9 percent at 11:43 a.m. in Sao Paulo. It earlier touched 9.88 percent, the lowest since Dec. 22. The real rose 0.1 percent to 1.7653 per U.S. dollar, from 1.7670 yesterday.

Policy makers cut borrowing costs by 50 basis points for a fourth straight meeting yesterday, bringing the benchmark rate to 10.5 percent, to shield the second-largest emerging market from Europe’s debt crisis. The central bank, in a statement identical to that after the previous meeting, said a “moderate adjustment” was consistent with reducing inflation to its 4.5 percent target in 2012.

“They are not signaling any kind of significant change in direction,” said Alberto Ramos, senior Latin America Economist at Goldman Sachs Group Inc. in New York. “Basically, they’re preserving all the flexibility they wanted to. There’s no signal that they’re close to reducing the pace of rate cuts to less than 50 basis points.”

Unanimous Decision

The bank’s board, led by President Alexandre Tombini, voted unanimously to cut the benchmark Selic rate by 50 basis points from 11 percent, as forecast by all 67 analysts surveyed by Bloomberg. Traders are anticipating policy makers will reduce the rate to as low as 10 percent by May, according to futures yields.

“The unchanged wording in the statement shows the central bank’s preference for the continuity of the current easing pace of 50 basis points beyond the next meeting,” Ilan Goldfajn, chief economist at Itau Unibanco Holdings SA, wrote in a note to clients today. A “restrictive external scenario and low growth in the domestic economy” support Itau’s expectation that the Selic will fall to 9 percent in 2012, he wrote.

The 0.1 percent gain in the real today compares with a 0.3 percent advance in the Mexican peso and 0.8 percent increase in the Chilean currency.

The real is underperforming most emerging-market currencies amid speculation the government may act to weaken the currency, said Italo Abucater, head of currency trading at ICAP Brasil.

Brazilian President Dilma Rousseff’s administration is studying measures to stem gains in the real, which has outperformed all major currencies since the start of the year, a government official familiar with internal discussions said yesterday.

The government may act at anytime to stem the gains, said the official, who isn’t authorized to speak publicly about the issue.

“We’re waiting to see what the government may do,” ICAP’s Abucater said by phone from Sao Paulo. “The currency still has positive flows as a result of overseas borrowing in the first two weeks of January. There’s an excess of dollars in the spot market.”

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net

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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.