Brazil Rate Futures Yields Rise From Record Low as Retail Gains

Yields on Brazilian interest-rate futures increased from a record low as retail sales rose in March at the fastest annual pace in two years, stoking concern inflation will accelerate.

Futures yields rose for the first time in six days on speculation further cuts in borrowing costs will be carried out “with parsimony,” as the central bank said in minutes to its April 17-18 meeting. Brazil’s real advanced on the evidence of consumer strength after falling this week to 2 per dollar for the first time in almost three years.

“This was not a weak number,” Luis Otavio de Souza Leal, chief economist at Banco ABC Brasil SA, said by phone from Sao Paulo. “If there isn’t a breakdown in Europe, a continuation of the central bank’s parsimony will be valid.”

The yield on the interest-rate futures contract due in January, the most actively traded today, rose four basis points, or 0.04 percentage point, to 7.83 percent at 1:30 p.m. in Sao Paulo after reaching a record low 7.77 percent yesterday. The real appreciated 0.3 percent to 1.9958 per U.S. dollar after touching 2.0080 yesterday, the weakest level since July 2009.

The central bank has reduced Brazil’s target lending rate by 3.5 percentage points since Aug. 31 to 9 percent, the most among the world’s 25 largest economies, according to data compiled by Bloomberg. Policy makers may reduce the benchmark below the record low 8.75 percent to 8 percent by the end of August 2012, trading in interest-rate futures shows.

Rate Cut Cycle

The yield on the interest-rate futures contract due in 2014 has tumbled 55 basis points this month as political instability in Europe fueled speculation Brazil’s central bank will lengthen the interest-rate cutting cycle that began in August.

High interest rates that are “incompatible” with the rest of the world pose an obstacle to faster economic growth, President Dilma Rousseff said May 15 in Brasilia.

The volume of retail sales rose 12.5 percent in March from a year earlier, the fastest pace since March 2010, the national statistics agency said today in Rio de Janeiro. The median forecast of analysts in a Bloomberg News survey was for an increase of 11.7 percent.

Economists covering Brazil’s economy raised their forecast for 2012 inflation in Brazil to 5.22 percent from 5.12 percent a week earlier, according to the median estimate in a May 11 central bank survey of about 100 economists published this week. The central bank targets inflation of 4.5 percent, plus or minus 2 percentage points.

The real dropped 0.3 percent earlier today after Rousseff said this week that the currency is “extremely overvalued.” The currency has traded weaker than 1.90 per dollar since April 30 as the central bank bought $7.2 billion in the spot market in April, the most since $8.4 billion purchased in March 2011.

“The market continues to be very volatile,” Hideaki Iha, a currency trader at Fair Corretora de Cambio e Valores, said by phone from Sao Paulo. “Problems in Greece and Spain are worsening.”

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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