Brazil Futures Yields Fall to Record as Bank Open to More Cuts

Yields on Brazilian interest-rate futures contracts dropped to a record low after the central bank signaled in minutes released today that it may make further reductions in borrowing costs.

“The bank minutes talk about moderate adjustments, so apparently they’re going to continue cutting,” Jankiel Santos, chief economist at Espirito Santo, said in a phone interview from Sao Paulo. “They took out any possibility of stopping cuts. The next cut will be small.”

The yield on the futures contract due in January 2014 slid for a third day, dropping two basis points, or 0.02 percentage point, to 8.81 percent. It earlier touched a record low of 8.74 percent. The real depreciated 0.3 percent to 1.8856 per dollar.

Brazil’s economy is recovering more slowly than expected, and any additional interest-rate cuts should be carried out with “parsimony,” the central bank said in the minutes of its April 17-18 meeting.

The bank’s board, led by President Alexandre Tombini, voted unanimously last week to cut the target lending rate by 75 basis points to 9 percent, bringing it close to a 2009 record low of 8.75 percent. The bank has reduced the benchmark by 350 basis points since August to bolster economic growth and shield the second-largest emerging market from the European debt crisis.

Santos said the minutes mark a shift from the bank’s prior position that interest rates were likely to stabilize at a level “slightly above” the historical low of 8.75 percent. Traders are betting policy makers will cut the benchmark to about that level in May, trading in futures contracts shows.

Meaning of ‘Parsimony’

“Now the market wants to know if ‘parsimony’ means that the next cut will be by 0.25 or 0.50 percentage point,” said Newton Rosa, chief economist at Sul America Investimentos, in a phone interview from Sao Paulo. The bank’s statement counts out the possibility of more aggressive cuts, he said.

Since policy makers began lowering rates, President Dilma Rousseff’s government has shifted its focus to spurring the economy from containing inflation.

It has cut taxes on consumer and industrial goods and boosted low-cost loans to the state development bank even as the pace of inflation has remained above target for a year and a half. Brazil’s growth dropped to 2.7 percent last year from 7.5 percent in 2010, its second-weakest performance since 2003.

Tombini’s Surprises

No central banker in the world’s top 10 economies has surprised analysts as frequently as Tombini. Since taking office 15 months ago, he set interest rates lower than economists expected in three out of 10 policy meetings, including an August reduction that all 62 analysts in a Bloomberg News survey failed to anticipate. Russia’s central bank, the second most unpredictable, defied economists in three out of 14 rate decisions in the same period.

While the Brazilian government has pledged growth of 4 percent to 4.5 percent this year, economists in the latest weekly central bank survey predicted expansion of 3.21 percent this year and 4.25 percent in 2013.

Economists cut their forecast for 2012 inflation to 5.08 percent in the central bank survey, from 5.32 percent at the start of the year. Policy makers have an inflation target of 4.5 percent, plus or minus 2 percentage points.

Lower inflation is allowing the central bank to be more aggressive in its purchase of dollars to help the real to depreciate, which benefits Brazilian industries, O Estado de S. Paulo reported, citing unidentified people from the government.

The government will probably act to achieve an exchange rate weaker than 1.80 reais per dollar, according to the newspaper. The government doesn’t expect the dollar’s appreciation to create a problem for inflation, O Estado said.

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