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Brazil Rate Futures Yields Fall as Central Bank Cuts Growth View

Yields on Brazilian interest-rate futures contracts dropped to a record after the central bank cut its economic growth forecast, encouraging speculation it will maintain the pace of reductions in borrowing costs.

The real pared declines after the central bank said it will auction currency swaps tomorrow in the third such auction this week. Brazil’s central bank said Latin America’s largest economy will expand 2.5 percent in 2012, compared with a March projection of 3.5 percent expansion.

“The most important point was the reduction of the GDP forecast,” Darwin Dib, chief economist at CM Capital, said by phone from Sao Paulo. “Rates should fall with this and the external scenario.”

Yields on the futures contract due in January 2014 fell seven basis points, or 0.07 percentage point, to 7.87 percent after touching a record low 7.85 percent. The yields have tumbled 166 basis points this quarter. The real dropped 0.1 percent to 2.0778 per U.S. dollar.

The central bank auctioned 60,000 currency swap contracts today, accepting bids worth $949.3 million for 19,000 contracts due in August and $2.05 billion on 41,000 contracts due in September, according to data on the bank’s website. The bank auctioned another 60,000 swap contracts on June 27, rolling over $3 billion worth of contracts expiring July 2.

Global Concern

The real declined after a German report showed an increase in unemployment as European leaders convened for a summit, heightening global growth concern.

“The swap auction has an effect on the market, but the decisive factor for the currency is the external environment,” Dib said. “The chance of having no concrete solution coming out of the European meeting is big, and the markets are expecting that.”

The real has lost 12 percent this quarter, the worst performance among 25 emerging-market currencies tracked by Bloomberg, as the European debt crisis sapped demand for emerging-market assets.

The swaps auctions are a reversal of central bank dollar purchases to weaken the local currency, which reached $7.2 billion in April, the most since March 2011.

The country’s exchange rate and borrowing costs will remain low, helping to boost economic growth, Finance Minister Guido Mantega told reporters in Brasilia yesterday.

Target Rate

Brazil has cut the target interest rate by 400 basis points to 8.5 percent since August, more than any other member of the Group of 20 nations. Traders are betting that the benchmark may be reduced to about 7.50 percent by the end of the year as the government tries to revive economic growth, interest-rate futures show.

Brazilian prices will rise 4.7 percent in 2012, according to the central bank’s reference scenario, compared with a 4.4 percent forecast in the previous report.

The central bank also lowered its inflation forecast for 2013 to 5 percent, compared with a 5.2 percent projection in the bank’s March report.

“Even though the central bank implicitly recognized the negative impact on inflation of lower interest rates and a weaker real, the monetary authority sees a more benign balance of risks now than in March thanks to a more deflationary external environment,” Enestor dos Santos, a senior Brazil economist at Banco Bilbao Vizcaya Argentaria SA (BBVA) in Madrid, wrote in a note to clients.

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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