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Brazil Rate Futures Yields Plunge on Plan to Cut Savings Returns

Yields on Brazilian interest-rate futures extended their weekly drop to the biggest since 2008 as the government planned to reduce returns on savings accounts to facilitate deeper cuts in the benchmark Selic rate.

The yields slid for a seventh straight week after the administration of President Dilma Rousseff announced yesterday new rules on the way savings rates in Brazil are calculated. The real touched its lowest level since September yesterday on speculation policy makers will keep reducing borrowing costs and are prepared to intervene if the currency strengthens.

“They’re eliminating the hurdle in which the savings accounts rules are a risk for further rate cuts,” Eduardo Suarez, head of Latin American currency strategy at Scotia Capital Inc., said in a phone interview from Sao Paulo. “Dilma wants rates at international levels. The question now is whether they’ll continue to target the Selic rate or will focus on pressuring banks to cut lending rates.”

Yields on the futures contract due in January 2014 fell 23 basis points, or 0.23 percentage point, to 8.28 percent at 6 p.m. in Sao Paulo after touching a record low 8.22 percent. It decreased 44 basis points this week in the biggest five-day drop since Aug. 19. The real depreciated 1 percent to 1.9276 per U.S. dollar, extending its drop this week to 2.1 percent. The currency touched 1.9355 yesterday, its weakest level since Sept. 22.

Savings-accounts returns will be limited to 70 percent of the benchmark Selic rate if it falls to 8.5 percent or lower, plus a fluctuating Reference Rate, Brazilian Finance Minister Guido Mantega said in a press conference in Brasilia yesterday. The decree must be approved by Congress.

‘Opening the Door’

“This is opening the door for rates to fall,” Alfredo Barbutti, an economist at Liquidez DTVM Ltda., said by phone from Sao Paulo.

Brazilian central bank President Alexandre Tombini said yesterday in a statement posted on its website that the changes on savings accounts consolidate the basis for sustainable economic growth and are a fundamental step toward removing relics inherited from Brazil’s era of high inflation. Brazil has lowered its key rate 350 basis points since August to 9 percent to fuel growth.

Scotia Capital’s Suarez said the market is waiting for indications from the central bank on how deep future rate cuts will be following the savings rules changes.

“Signals are changing very fast,” he said. “Tombini was very clear three weeks ago when he said the rate-cutting cycle would stop above the previous record low” of 8.75 percent. “The central bank has notably been absent this week. It’s mostly been the Finance Ministry and Rousseff speaking.”

Dollar Purchases

Brazil’s central bank bought $5.5 billion in the spot market from April 1 through April 20, the most since $6.6 billion purchased in July, to help exporters by weakening the local currency.

Rousseff has been pressuring banks to reduce loan spreads following the rate cuts. Brazil’s private banks will reduce spreads to be able to compete with state-owned banks, which are reducing interest rates on loans, Mantega told reporters in Sao Paulo today. He said a weaker real and lower rates are pleasing industrial companies and that credit growth in 2012 is slower than desirable.

“Mantega was saying today that he wants faster credit growth, so one objective of these policies is to boost credit and speed up growth of the economy,” Suarez said.

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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