Brazil Rate Futures Yields Drop as Tombini Signals More Cuts

Yields on Brazilian interest-rate futures contracts fell for a fifth straight day as industrial production unexpectedly contracted in April and policy makers signaled more reductions in borrowing costs.

Central bank President Alexandre Tombini cut the target lending rate by a half-percentage point to a record low 8.5 percent last night, citing in a statement “fragility” abroad that is having a “disinflationary” effect on Latin America’s biggest economy. The Brazilian real posted a third consecutive monthly drop.

“The repetition of the language from the April statement indicates that rates will fall again in the next meeting,” Tony Volpon, the head of emerging-markets research for the Americas at Nomura Holdings Inc., said by phone from New York. “We may see an adjustment in the market for another 50 basis-point cut.”

Yields on the futures contract due in January 2014 fell seven basis points, or 0.7 percentage point, to 8.27 percent at 6 p.m. in Sao Paulo. The real fell 0.3 percent to 2.0227 per U.S. dollar. The currency fell 5.7 percent in May.

Brazil’s industrial output decreased 0.2 percent in April from a month earlier, the national statistics agency said today in Rio de Janeiro. The median forecast of economists in a Bloomberg News survey was for no change last month. Output declined 2.9 percent from a year ago.

Economic Outlook

Analysts lowered for a third consecutive week their growth forecast for this year, projecting the world’s biggest emerging market after China to grow 2.99 percent, according to a central bank survey published May 28.

“This is a difficult year for industry in spite of all the stimulus,” Alessandra Ribeiro, an economist at Tendencias Consultoria Integrada, said by phone from Sao Paulo. “The external and the domestic environment are not going to change much to bolster industry.”

Ribeiro expects Brazil’s policy makers will make two more 50 basis point cuts in the target lending rate in July and August to close 2012 at 7.5 percent. The benchmark has been lowered by 4 percentage points since Aug. 31.

“The reversal of monetary policy should begin more in April 2013,” according to Ribeiro. “We project an increase of 200 basis points.”

The government has stepped up measures to boost economic growth. Last week it eased reserve requirements to free as much as 18 billion reais for lenders to grant automobile loans. It also cut taxes to reduce car prices by as much as 10 percent and trimmed a levy on consumer goods.

U.S. Job Market

The real fell after a report showed the number of Americans applying for unemployment insurance payments rose last week to a one-month high, fueling concern the European debt crisis is slowing the world’s largest economy.

Poor economic data in the U.S. and Brazil drove the real’s decline, according to Luciano Rostagno, chief strategist at Banco WestLB in Sao Paulo.

“The numbers in the U.S. were bad,” Rostagno said in a telephone interview. “The combination of these indicators generated a reversal in the markets. The market is operating under the assumption of more prolonged rate cuts, and the currency is showing this influence.”

The real rallied 1.8 percent last week as the central bank auctioned currency swaps to curb its drop. The swap sales were a reversal from the previous month’s policy of stepped-up dollar purchases aimed at weakening the currency to help exporters. The central bank bought $7.2 billion in the spot market in April, the most since purchases of $8.4 billion in March 2011.

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