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Brazil Futures Yields Surge on Bets Minutes to Show Cuts Ending

Yields on Brazilian interest-rate futures jumped, snapping a six-day drop, on speculation the central bank will indicate in minutes from last week’s meeting that it plans to slow the pace of cuts in borrowing costs.

The yield on the contract due in January 2014 rose 16 basis points, or 0.16 percentage point, to 8.39 percent. The central bank is scheduled to release minutes from last week’s rate decision on June 8.

“The central bank could show in the minutes that the idea isn’t to cut interest rates more deeply for now,” said Luis Otavio De Souza Leal, chief economist at Banco ABC Brasil SA (ABCB4), in a phone interview from Sao Paulo.

The real weakened 0.9 percent to 2.0585 per U.S. dollar.

A report showing Brazil’s economy expanded 0.2 percent in the first quarter confirms that Latin America’s biggest economy is recovering “very gradually,” central bank President Alexandre Tombini said in an e-mailed statement June 1. Domestic demand fueled by a “moderate” expansion of credit and a strong labor market will allow growth to accelerate in coming months even as the global outlook remains “complex,” Tombini said.

Growth in the first three months of the year was lower than expected by all but one of 50 analysts surveyed by Bloomberg, whose median forecast was for a 0.5 percent expansion.

Growth Outlook

Tombini’s comments overshadowed falling analyst expectations for Brazil’s expansion this year, Leal said. Economists reduced their forecasts for the expansion to 2.72 percent, down from a previous forecast of 2.99 percent, in a weekly central bank survey. The economists cut their outlook for inflation this year to 5.15 percent from 5.17 percent.

Policy makers reduced the target lending rate by a half-percentage point to a record low 8.5 percent last week, citing “fragility” abroad that is having a “disinflationary” effect on Latin America’s biggest economy. Brazil has lowered the target rate by 4 percentage points since August, the most among G-20 nations.

While growth will accelerate in the second half of 2012, the government will be “satisfied” if this year’s expansion tops last year’s 2.7 percent, Finance Minister Guido Mantega told reporters June 1.

Brazil’s deteriorating outlook is combining with global growth concern to erode demand for the real, said Carlos Kawall, chief economist at Banco J. Safra SA.

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; Blake Schmidt in Bogota at bschmidt16@bloomberg.net

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

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