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Brazil Rate Futures Fall Fifth Week on Prices; Real Declines

Yields on Brazilian interest-rate futures contracts dropped for a fifth week as inflation below forecasts fueled speculation the central bank will cut benchmark borrowing rates to less than 10 percent.

The yield on the Brazilian interest-rate futures contract due in January 2013 fell 21 basis points this week, or 0.21 percentage point, to 9.29 percent, its fifth straight weekly decline. The yield fell four basis points today at the close of trading in Sao Paulo, after earlier touching a record low of 9.27 percent. The real weakened 0.3 percent to 1.7224 per U.S. dollar today.

Three out of four Brazilian price reports this week showed slower inflation than analysts estimated. The first preview of the IGP-M index said prices fell 0.1 percent in January, after a 0.22 percent rise in the earlier period, the Rio de Janeiro-based Getulio Vargas Foundation said today. Consumer prices in Sao Paulo and nationally both rose less than forecast in the past month, data showed earlier this week.

“The inflation numbers are better,” said Flavio Serrano, a senior economist at Banco Espirito Santo Investment Bank in Sao Paulo. “The market forecasts that the Selic can fall to 9 percent to 9.25 percent” this year, he said.

Consumer prices in the full month of January, as measured by the IPCA index, rose 0.56 percent, matching the median estimate of 49 analysts surveyed by Bloomberg. The annual inflation rate was 6.22 percent.

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

Traders’ Bets

Inflation trended downward in January and “has some room to continue doing so in the next months, but in yearly terms it will remain above target, which will not prevent the central bank from taking real interest rates below neutral levels,” Enestor Dos Santos, senior Brazil economist for Banco Bilbao Vizcaya Argentaria SA in Madrid, wrote in a note to clients today.

Traders are anticipating policy makers will reduce the benchmark lending rate by 125 basis points to as low as 9.25 percent by June, according to futures yields.

Brazil’s real posted its first weekly decline this year, losing 0.3 percent, after European finance ministers withheld a Greek rescue package, reigniting speculation a default would spur a recession in Europe.

The move fueled speculation Greece may miss debt payments, sapping demand for higher-yielding assets, said Hideaki Iha, a currency trader at Fair Corretora de Cambio e Valores in Sao Paulo.

“The problems in Greece still aren’t over,” Iha said in a telephone interview.

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