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Tombini No Fraga or Meirelles as Rate Bets Fade: Brazil Credit

Alexandre Tombini
Traders are moving closer to betting Alexandre Tombini will be the first Brazilian central bank president in more than a decade to keep the benchmark interest rate unchanged at his first policy meeting. Photographer: Goh Seng Chong/Bloomberg

Traders are moving closer to betting Alexandre Tombini will be the first Brazilian central bank president in more than a decade to keep the benchmark interest rate unchanged at his first policy meeting.

Interest-rate future yields show traders cut their wagers for an increase in the key rate by half since Dec. 8 to 25 basis points, or 0.25 percentage point, yesterday, according to data compiled by Bloomberg. Gustavo Franco was the last central bank president to keep borrowing costs unchanged at his first meeting in 1997.

Tombini may keep the rate steady after a smaller-than-expected increase in retail sales in October signaled the expansion in Latin America’s biggest economy is easing. Slowing food price increases are fueling speculation the inflation rate will decline from 5.63 percent, the highest since February 2009. Current central bank head Henrique Meirelles raised rates at his first meeting in 2003, while Arminio Fraga boosted borrowing costs when he became president of the institution in 1999.

“Inflation might ease on the back of this drop in food commodity prices and from this perspective, we cannot disregard the possibility that the central bank could buy some time here,” Zeina Latif, a senior economist with RBS Securities Inc. in Sao Paulo, said in a telephone interview. “Markets are divided between zero and 50 basis points.”

Speculation China will raise borrowing costs is also fading, with bond yields showing the central bank will seek to damp inflation by increasing banks’ reserve requirements rather than interest rates.

‘Not Opportune’

Meirelles, who increased reserve and capital requirements for banks on Dec. 3, held the main interest rate at 10.75 percent in his final meeting earlier this month. The central bank’s eight-member board, in a statement, said it was “not opportune to re-evaluate the monetary policy strategy” because “more time” is needed to gauge the economic impact of the recent measures to slow credit growth.

“The announcement wasn’t that clear after the policy meeting,” Bertrand Delgado, an economist at Roubini Global Economics LLC in New York who forecasts a 50 basis-point increase in January, said in a telephone interview. “But you get the sensation, depending on the data, they could raise rates in January or wait a little bit longer. So far the data shows that they might wait a little bit longer.”

The decision to raise banks’ reserve requirements to slow credit growth may “precede” conventional monetary policy action, central bank policy makers said in the minutes of the meeting released today.

Retail Sales

Policy makers raised the rate this year by 200 basis points to cool the economy. Analysts predict growth of 7.6 percent this year, the fastest pace in more than two decades, according to a Dec. 10 central bank survey of about 100 economists.

Retail sales rose 0.4 percent in October from September, less than the 1.1 percent median forecast by 25 economists surveyed by Bloomberg, the national statistics agency said Dec. 14. The IGP-M price index, the nation’s broadest gauge of inflation, rose 0.83 percent in the first preview of December, less than the 0.95 percent median forecast. Increases in prices for agricultural products slowed to 1.4 percent, according to the index.

The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries rose 11 basis point to 186 at 5:03 p.m. New York time, according to JPMorgan Chase & Co.

The cost of protecting Brazilian bonds against default for five years fell 1 basis point to 115, according to CMA prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The real rose 0.4 percent to 1.7027 per U.S. dollar.

Inflation Outlook

Yields on Brazil’s interbank rate futures contract due in January 2012 rose 4 basis points to 11.87 percent yesterday, indicating traders expect Tombini will increase borrowing costs by about 200 basis points by the end of next year. Tombini, who has served on the central bank’s board since 2005, was confirmed by the senate yesterday.

The central bank didn’t return a message seeking comment after business hours yesterday.

Francisco Lopes, who was acting central bank president before Fraga took office in 1999, also increased rates at his first and only policy meeting.

Brazilian economists raised their inflation forecasts for the fifth straight week in the central bank survey. Consumer prices will rise 5.38 percent over the next 12 months, according to the median forecast in the survey published Dec. 13.

Brazil targets annual inflation of 4.5 percent, plus or minus two percentage points.

‘Little Time To Waste’

“There’s little time to waste,” Marcelo Carvalho, head of Latin American research at Banco BNP Paribas Brasil in Sao Paulo, which projects a 50 basis-point increase next month, said in a telephone interview. “Inflation argues for swift policy action, prompt response.”

The central bank’s decision to increase reserve requirements earlier this month is prompting some traders and analysts to conclude that policy makers can use other tools to slow inflation, said RBS’s Latif, who forecasts a 50 basis-point increase in January.

The central bank lifted reserve requirements on time deposits to 20 percent from 15 percent and raised an additional requirement for non-interest bearing accounts to 12 percent from 8 percent. The measures will remove 61 billion reais ($35.7 billion) from circulation, according to the central bank.

“Analysts are not so confident that the tightening needs to be significant,” Latif said. “They know that other measures could help the central bank. And if it’s not significant, maybe they could postpone once more as they did in December.”

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