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Brazil Real Falls as Italian Bond Auction Sparks Growth Concern

Brazil’s real fell after a jump in Italy’s borrowing costs sparked concern European leaders will fail to contain the region’s debt crisis, weakening demand for higher-yielding assets.

The real dropped 1.3 percent to 1.7669 per dollar, from 1.7435 on Nov. 11. Yields on the interest-rate futures contract due in January 2013 fell two basis points, or 0.02 percentage point, to 9.95 percent. The yields dropped below 10 percent last week for the first time in four years.

Brazil’s currency declined for the first time in three days after Italy sold 3 billion euros ($4.1 billion) of five-year notes priced at the highest yields since June 1997. Brazil’s central bank loosened restrictions on consumer lending after the market close on Nov. 11 to shore up economic growth.

“Risk aversion resumed its climb and the dollar is gaining against other currencies,” said Vladimir Caramaschi, chief economist of Credit Agricole’s Brazilian unit, in a telephone interview from Sao Paulo.

Brazil’s central bank cut capital requirements for some consumer loans with maturities of up to five years, including car loans, according to a statement published on the bank’s website Nov. 11 after markets had closed.

Government Concern

“The government is getting much more concerned with the current slowdown and is starting to push other buttons to try to prevent a faster-than-expected contraction,” Marcelo Salomon, chief economist for Brazil at Barclays Plc. in New York, wrote in a research note today. “We do not believe these measures should be seen as substitutes to new rounds of monetary policy easing,” but the news supports the view that the central bank “is not willing to accelerate the pace” of rate reductions, he wrote.

The central bank cut the Selic rate twice since August, saying the “substantial deterioration” in the world economy will curb inflation. Yields on futures suggest traders are betting policy makers will lower the rate at least 50 basis points from 11.5 percent on Nov. 30, according to data compiled by Bloomberg.

Economists covering Brazil continued to trim their forecasts for inflation, growth and interest rates. Consumer prices will increase 5.56 percent next year, according to the median forecast in a Nov. 11 central bank survey of about 100 economists published today, compared with a forecast of 5.57 percent the previous week. It was the fourth straight week the analysts cut their 2012 inflation forecast.

Inflation Forecasts

Consumer prices, as measured by the IPCA index, will rise 6.48 percent this year, down from a forecast of 6.50 percent last week, the survey found.

Economists expect policy makers to cut the benchmark rate 0.5 percentage point this month, and 1.5 percentage points to 10 percent by the end of 2012, the survey found, down from a forecast of 10.50 percent the previous week. The central bank cut the Selic rate to 11.5 percent from 12 percent last month, saying the “substantial deterioration” in the world economy will curb inflation, even with lower borrowing costs.

Brazil targets inflation of 4.5 percent, plus or minus 2 percentage points. Inflation has exceeded the upper limit of the target range for the last seven months.

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