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Brazil Rate-Futures Yields Decline as Sao Paulo Inflation Slows

Yields on Brazilian interest-rate futures contracts fell to a record after Sao Paulo inflation was below forecasts and a report said the government will change savings-account rules to pave the way for lower borrowing costs.

The yield on the contract due in January 2013 fell six basis points, or 0.06 percentage point, to 9.33 percent, after earlier touching a new low of 9.30 percent. The real gained 0.2 percent to 1.7169 per U.S. dollar, from 1.7206 yesterday.

Consumer prices in Brazil’s largest city, as measured by the Foundation Economics Research Institute, rose 0.42 percent in the past month, compared with a 0.68 percent increase in the earlier period. The median estimate of 19 analysts surveyed by Bloomberg was for a 0.57 percent rise. Signs of cooling inflation prompted traders to bolster bets on deeper interest-rate reductions, Otavio de Souza Leal, chief economist at Banco ABC Brasil SA, said by phone from Sao Paulo.

“The FIPE index is the second to come below estimates,” this week, Souza Leal said.

Consumer prices in Brazil, as measured by the IPC-S index, rose 0.46 percent in the 30 days through Feb. 7, after climbing 0.81 percent in the previous period, the Getulio Vargas Foundation said yesterday. The increase was less than the 0.65 percent median estimate of 21 economists surveyed by Bloomberg.

Futures yields were also driven lower by speculation the government will change savings account rules in order to pave the way for further interest-rate cuts, Souza Leal said.

Policy makers have cut the benchmark rate 200 basis points since August to 10.5 percent. They signaled in the minutes of their January meeting that they are likely to trim the lending rate below 10 percent this year.

Savings Accounts

President Dilma Rousseff plans to reform the rules for savings accounts this year to enable further cuts in the country’s benchmark Selic interest rate, Valor Economico reported today, without saying where it got the information.

The way returns on savings accounts are calculated needs to be changed before the Selic reaches 8.5 percent, according to the Sao Paulo-based newspaper.

The minimum interest rate paid on savings accounts in Brazil “is an obstacle and if it was removed it could bring rates lower,” Souza Leal said.

Savings deposits in Brazil pay a fixed rate of 6 percent plus the reference rate, and are exempt from income tax. If the benchmark Selic rate were to fall to 8.5 percent, the return on savings accounts after taxes would be greater than the return on assets priced off the Selic, weakening incentive to invest in other fixed-income securities like government bonds.

Neutral Rates

Nomura Securities International Inc. cut its estimate for Brazil’s benchmark interest rate at the end of this year to 8.5 percent from 9 percent, according to an e-mailed report.

Policy makers’ recent discussion that neutral rates, the policy rate that neither stimulates nor contracts demand, have fallen show that the central bank is willing to “err on the side of less caution” to lower borrowing costs in Brazil, Tony Volpon, Latin America strategist with Nomura in New York, wrote in the report.

The real reversed an earlier decline of as much as 0.4 percent after European Central Bank President Mario Draghi said Greek party leaders had reached an agreement on austerity measures needed to obtain a bailout. The move boosted optimism European leaders will succeed in containing the region’s debt crisis and protecting global growth, said Felipe Brandao, emerging-markets strategist at Icap do Brasil CTVM.

“We hope a deal in Greece could help the euro and then the markets could get a break,” Brandao said by phone from Sao Paulo.

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