Brazil Signals Rate May Fall to Record on Global Fragility
Brazil signaled it may cut its benchmark interest rate to a record low as a still “fragile” global economy eases inflationary pressures in the world’s sixth-biggest economy.
The bank, in a statement accompanying its decision last night to lower the Selic rate by 75 basis points to 9 percent, said risks of missing its 4.5 percent inflation target are “limited” as the global outlook remains “disinflationary.” In the minutes to its meeting last month, the bank said borrowing costs would probably stabilize “slightly above” the record low 8.75 percent.
“The guidance they so explicitly gave in the minutes was very clear, and now they are disavowing it,” said Alberto Ramos, chief Latin America economist at Goldman Sachs & Co. “It’s a very dovish statement -- there’s no signal whatsoever that this is the end of the cycle.”
While yesterday’s move, the second-straight 75 basis point cut, was anticipated by 67 of 69 analysts in a Bloomberg survey, economists had been forecasting that it would be the bank’s last this year. That’s because inflation, even after slowing to a 17- month low of 5.24 percent in March, is expected to stay above the target this year and in 2013.
Yields on the interest rate futures contract due in January 2014, the most traded today, fell 22 basis points to 8.88 percent at 9:44 a.m. Brasilia time, as traders bet on further rate cuts. The real slid 0.52 percent to 1.8885 per U.S. dollar.
President Dilma Rousseff’s administration has stepped up its efforts to revive growth in recent weeks, as manufacturers already hard hit by a 23 percent rally in the currency since the end of 2008 must now contend with sluggish global growth. In addition to slashing borrowing costs more than any other member of the Group of 20 since last August, the government has also cut taxes on consumer goods and boosted public investment to ensure economic growth of 4.5 percent this year.
Gross domestic product expanded 2.7 percent in 2011, less than that of Brazil’s neighbors and below the 3 percent growth by Germany amid the euro debt crisis. Economists forecast growth this year of 3.2 percent and 4.3 percent in 2013, according to an April 13 central bank survey of about 100 analysts.
The same survey showed policy makers would keep the Selic rate at 9 percent until March and raise it to 10 percent by July 2013.
‘Laid a Trap’
Ramos said he expects investors to increase bets on another 25 or 50 basis-point cut when the bank’s board next convenes on May 29-30. Since Brazil began targeting inflation in 1999, the Selic has only once before fallen below 10 percent, in the wake of the 2008 collapse of Lehman Brothers Holdings Inc.
Some economists expect the bank will leave rates unchanged at its next meeting after Tombini in an April 9 interview reiterated the guidance provided in the minutes about the limits to its easing strategy.
“They laid a trap for themselves,” Andre Perfeito, chief economist for Gradual Investimentos, said in a phone interview from Sao Paulo. “The Selic rate has been neutralized, and they’ll have to rely on other monetary policy instruments going forward.”
Rousseff has already instructed state-run banks to lower rates in a bid to pressures its private competitors to do the same. Even as Tombini cut the benchmark rate, banks raised average consumer interest rates to 45.4 percent in February from 45.1 percent in January as default rates rise.
Consumer prices rose 0.21 percent in March, less than all 50 analysts surveyed by Bloomberg. While inflation expectations show economists’ views moving into line with those of the bank, they still forecast Tombini won’t meet his pledge to bring inflation back to the 4.5 percent target by year’s end.
The yield gap between inflation-linked bonds and interest- rate futures, a gauge of investors’ expectations for annual consumer price increases by 2015, fell to 5.6 percentage points yesterday, from 6.1 percentage points a month earlier, according to data compiled by Bloomberg.
Finance Minister Guido Mantega said the “outstanding” inflation result in March creates room for the government to step up measures to revive growth.
The economy contracted for a second straight month in February, according to the central bank’s seasonally-adjusted economic activity index, while industrial output shrank 3.9 percent from a year earlier.
Carmakers including Daimler AG’s Mercedes-Benz and General Motors Co are among companies that have ordered mandatory worker furloughs in Brazil this year as a result of the currency gains that have helped turn a manufacturing trade surplus of $8.7 billion in 2005 into a deficit of $93 billion last year.
Shares in MRV Engenharia & Participacoes SA, Brazil’s third-biggest homebuilder by revenue, fell 5.1 percent yesterday, the most in two months, after first-quarter sales decreased 2 percent from a year earlier and new projects fell 38 percent.
“There was an expectation that the recovery could be happening faster in the second quarter than it actually is,” Marcelo Salomon, co-head of Latin America economics at Barclays Plc, said in a phone interview from New York. “If they feel they have space, they could test new levels, they could go below 8.75 percent.”
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