Brazil’s Unemployment Rate Unexpectedly Fell to 6% in April

Brazil’s unemployment rate unexpectedly declined in April, adding to evidence that the labor market remains tight and may limit the room for more interest rate cuts.

Joblessness fell to 6 percent in April from 6.2 percent the month before, the national statistics agency said today in a report distributed in Rio de Janeiro. The number was the lowest ever for April and below the 6.2 percent median forecast in a Bloomberg survey of 38 analysts.

Yields on interest rate futures rose as traders increased bets policy makers will have to reverse course and raise rates early next year after reducing borrowing costs to a record low. Central bank President Alexandre Tombini said this week that record low unemployment and wage increases, along with credit growth, are helping sustain domestic demand even as economic growth slowed.

“The labor market remains tight,” Newton Rosa, chief economist at SulAmerica Investimentos, said in a phone interview from Sao Paulo. Rising wages “may keep the pressure on service prices, limiting a drop in the inflation rate. This may limit the room for bigger interest rate cuts.”

The yield on the interest rate future contracts maturing in January 2014 rose 12 basis points, or 0.12 percentage point, to 8.46 percent at 11:38 a.m. local time. The real declined 0.9 percent to 2.0509 per dollar.

Rising Wages

Workers’ average income in April rose 6.2 percent from a year ago to 1,719.50 reais ($846) a month, today’s report showed. Compared with March, income declined 1.2 percent.

Economic recovery in Brazil has been slower than expected even as the government cut interest rates close to a record low, reduced taxes and increased subsidized credit to businesses. Traders are wagering that Tombini will cut the benchmark Selic rate for a seventh straight meeting next week to provide further support for the economy amid the European debt crisis and a slowdown in China.

Even as the economy has slowed, unemployment has remained at levels that stoke inflation, due to strong demand for labor-intensive services, said Flavio Serrano, a senior economist at Espirito Santo Investment Bank. Retail sales rose 12.5 percent in March from a year earlier, while industrial output fell 2.1 percent. The economy unexpectedly contracted in March, according to the central bank’s economic activity index, after falling in January and February.

Service Industries

Contax Participacoes SA, Brazil’s biggest publicly traded call-center company, plans to hire 12,000 new employees this year to expand its business in Latin America. More than half of those hires will be in Brazil, the Rio de Janeiro-based company says.

“The services sector is likely to remain strong, and due to that we do not see the unemployment rate climbing in a strong way,” Serrano said in a telephone interview before the report was published. “In a few months, all of this monetary stimulus is likely to provide a further boost for the Brazilian economy.”

Serrano estimates that the so-called NAIRU, or non-accelerating inflation rate of unemployment, is 6.5 percent. Unemployment reached a record low of 4.7 percent in December.

Consumer prices climbed 5.05 percent in mid-May from a year earlier, the slowest pace in 19 months. Economists forecast inflation of 5.21 percent this year and 5.6 percent in 2013, according to the most recent central bank survey. Brazil targets inflation of 4.5 percent, plus or minus two percentage points.

Brazil has cut borrowing costs 350 basis points, to 9 percent, since August, more than any other country in the Group of 20 nations. Traders expect Tombini to reduce the Selic rate to a record low of 8.5 percent next week, according to Bloomberg estimates based on interest rate futures contracts.

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