Rate-Futures Yields Plunge as Central Bank Signals Cuts: Brasilia Mover
Yields on Brazilian interest-rate futures contracts fell the most in almost four months after the central bank signaled plans to cut the benchmark interest rate by at least another full percentage point.
The yield on the contract due in January 2013, the most actively-traded today in Sao Paulo, plunged 18 basis points, or 0.18 percentage point, to 9.66 percent. It was the biggest decline on a closing basis since Oct. 3. The real advanced 0.7 percent to 1.7491 per U.S. dollar, from 1.7620 yesterday. The currency earlier touched 1.7320, the strongest since Nov. 4.
There is a “high” probability interest rates will fall to one digit because of significant structural changes in Brazil’s economy, including the expansion of the credit market, the central bank’s board, led by President Alexandre Tombini, said in the minutes of its Jan. 17-18 meeting published today. After the report, traders scrapped bets that faster-than-forecast inflation and record-low unemployment would prompt policy makers to cut interest rates to no lower than 10 percent from 10.5 percent.
“There’s the fundamental news today that the Selic will continue to go lower,” Roberto Padovani, the chief economist with Votorantim CTVM Ltda., said in an interview from Sao Paulo. “I was expecting Selic at 10 percent but I think the more probable outcome is 9.5 percent.”
Brazil’s central bank board voted unanimously Jan. 18 to reduce the benchmark rate to 10.5 percent, as forecast by all 67 analysts surveyed by Bloomberg. Policy makers have cut borrowing costs by 2 percentage points since August to protect Latin America’s largest economy from the European debt crisis.
Traders are anticipating Tombini will reduce the Selic rate to as low as 9.5 percent by May, rate futures show.
‘Flexible’ Monetary Policy
Brazil will make room for a more “flexible” monetary policy by containing public spending as part of a plan to ensure economic growth of at least 4 percent this year, Finance Minister Guido Mantega told reporters this week.
President Dilma Rousseff’s administration will cut enough of its 2012 budget to ensure the government meets its target of a budget surplus before interest payments of 139.8 billion reais ($80.5 billion), Mantega said.
Consumer prices rose 0.65 percent in the month through mid- January, the national statistic agency said Jan. 24. The increase was bigger than forecast by all 44 analysts surveyed by Bloomberg, whose median estimate was a 0.56 percent rise.
U.S. Rate Outlook
The Federal Reserve’s pledge to keep U.S. borrowing costs near zero through 2014, a sign it doesn’t expect a fast recovery, also contributed to the decline in interest-rate futures yields, Padovani said. Lower rates are justified by “a fiscal policy that permits this and an external outlook that also contributes to lower interest rates,” he said.
Fed Chairman Ben S. Bernanke said yesterday policy makers are considering more bond purchases to boost growth after extending a pledge to keep interest rates low through at least late 2014.
The real, the second-best performer among major currencies today, rallied on Bernanke’s comments as investors bet near-zero rates in the U.S. will fuel demand for higher-yielding Brazilian assets, said Marina Santos, chief economist at Squanto Investimentos in Sao Paulo.
“Since rates in the U.S. are going to remain low for a long time, we could have greater inflows into Brazil,” Santos said in a telephone interview. “The carry trade will become more attractive.”
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
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