Biggest Trader-Economist Divergence Signals Cut: Brazil Credit

Brazil's Central Bank President Alexandre Tombini
The yields suggest traders are betting central bank president Alexandre Tombini will cut the Selic between 50 basis points and 75 basis points starting in October and another 50 basis points next year. Photographer: Paulo Fridman/Bloomberg

Brazilian interest-rate forecasts by economists and traders are diverging by the most this year. Recent history shows traders are more accurate predictors of the country’s monetary policy.

The central bank will hold the benchmark Selic rate at 12.5 percent this year, according to the median forecast of about 100 economists in a central bank survey. Yields on interest-rate futures show traders are betting policy makers will lower borrowing costs by 68 basis points, or 0.68 percentage point, this year, according to data compiled by Bloomberg. In Chile, traders also expect a rate cut this year while economists predict the bank will keep it unchanged.

Economists and traders are at odds over how much Latin America’s biggest economy will slow as global growth falters. Traders correctly predicted the central bank’s rate increases in April 2011 and July 2010, the last two times that they disagreed with economists, according to data compiled by Bloomberg.

“Economists always react much later than traders because they don’t want to change their views too frequently,” Mauricio Junqueira, who helps manage about $300 million at Squanto Investimentos, said in a telephone interview from Sao Paulo. “They tend to wait until the last minute. I believe the central bank will cut if you look at the global growth story and the possible hit on Brazil.”

Goldman Forecast

Yields on the futures contract due in January fell 38 basis points in the past month, the most since March, to 12.09 percent, as concern the U.S. may relapse into recession mounted and the European debt crisis deepened. The yields suggest traders are betting central bank president Alexandre Tombini will cut the Selic between 50 basis points and 75 basis points starting in October and another 50 basis points next year.

While economists in the central bank’s survey on Aug. 5 scrapped their calls for a rate increase this month, they predict policy makers will keep borrowing costs steady through next year. Goldman Sachs Group Inc. ditched last week its forecast for three more rate increases this year, predicting the central bank will stay on hold.

Traders correctly predicted in April that the central bank would raise the benchmark rate by a quarter-percentage point, while the median forecast of 58 economists in a Bloomberg survey was for a bigger increase of half a percentage point. In July 2010, traders accurately forecast the bank’s 50-basis point increase while economists had predicted 75.

‘More Challenging’

Tombini, who has raised rates five times this year to stem the fastest inflation in six years, told reporters on Aug. 18 that policy makers will take into account slower growth and a “more challenging” global economy at their Aug. 30-31 meeting.

“The central bank will look at the international scenario and try to be preemptive,” Solange Srour, chief economist at BNY Mellon ARX Investimentos in Rio de Janeiro, said in a telephone interview.

Srour said she expects the central bank to cut the benchmark rate 50 basis points both in October and November.

Brazil’s economy shrank in June for the first time since December 2008, the central bank said on Aug. 17. Credit growth eased to 1.1 percent in July, the slowest pace in four months, the central bank said yesterday.

Paulo Leme, Goldman Sachs’s economist, lowered Brazil’s growth forecast on Aug. 19 to 3.7 percent this year from a previous estimate of 4.5 percent. He said traders are “way ahead” of themselves.

‘More Pessimistic’

“The main difference between our call and the local market call for Selic is that they are more pessimistic about the outlook for policies and growth in advanced economies,” Leme, based in Miami, said in a report to clients on Aug. 19. “As a result, they work with a much deeper and faster drop in global growth than we do.”

Leme said in an e-mail yesterday that he was on vacation when asked to comment further.

The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries rose four basis points today to 205, according to JPMorgan Chase & Co.’s EMBI Global index.

The real advanced 0.3 percent at 1.6094 per dollar.

The cost of protecting Brazilian bonds against default for five years fell two basis points to 163, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Inflation Rate

The central bank has raised the benchmark rate 175 basis points this year as credit and wage growth helped push the annual inflation rate to 7.1 percent in the year through mid-July. The government targets an annual inflation rate of 4.5 percent, plus or minus two percentage points.

“It takes a lot for economists to change their calls because they don’t put money in the game,” BNY Mellon’s Srour said. “The market is looking at the international scenario and what’s happening in other emerging markets -- as does the central bank. The central bank will proceed with caution.”

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