Brazil Real Falls as Report Shows Slower-Than-Forecast Inflation

Brazil’s real dropped for the first time in three days after a report showed inflation was slower than economists forecast, bolstering speculation the central bank will maintain the pace of cuts in borrowing costs.

Yields on Brazilian interest-rate futures contracts traded near record lows as the national statistics agency said today that consumer prices as measured by the IPCA-15 index rose 0.18 percent in the month through mid-June, less than the median forecast of 0.29 percent among economists surveyed by Bloomberg.

The real depreciated 1.8 percent to 2.0619 per U.S. dollar, the biggest drop since June 11. The yield on the interest-rate futures contract due in January decreased one basis point, or 0.01 percentage point, to 7.72 percent. It touched a record low 7.65 percent on June 14.

“Inflation isn’t a problem now, and the central bank will have to cut borrowing costs to stimulate investment,” Andre Perfeito, the chief economist at Gradual Investimentos, said in a phone interview from Sao Paulo. “The outlook abroad is getting worse again and commodities are falling. The central bank doesn’t have any reason not to keep cutting rates.”

The real remained lower after a U.S. report showed manufacturing in eastern Pennsylvania, southern New Jersey and Delaware shrank in June at the fastest pace in almost a year. The Federal Reserve Bank of Philadelphia’s general economic index fell to minus 16.6, the lowest level since August, from minus 5.8 in the previous month. Zero is the dividing line between growth and contraction.

Drop in Unemployment

The decline in Brazilian interest-rate futures yields was limited as the unemployment rate fell and a newspaper reported that the government has decided to allow Petroleo Brasileiro SA to raise fuel prices, according to Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA.

“Counterbalancing the more favorable inflation numbers, you have unemployment, which surprised by falling, along with the Petrobras news,” Rostagno said in a telephone interview from Sao Paulo.

Brazil’s unemployment rate fell to 5.8 percent in May from 6 percent in the previous month, the national statistics agency said today. The median estimate of economists in a Bloomberg survey was for the jobless rate to remain at 6 percent.

The Brazilian government has decided to authorize the state-controlled oil company to raise fuel prices, Folha de S.Paulo reported, without saying where it obtained the information. Gasoline prices may increase 10 percent at refineries, with a lower percentage being passed on to consumers, the newspaper said.

A Petrobras official declined to comment in an e-mailed response to questions from Bloomberg News. A Finance Ministry official also declined to comment.

Brazil’s central bank has reduced the target lending rate by four percentage points to a record low 8.5 percent since August on concern slower global growth will have a disinflationary impact on Brazil. Traders expect the benchmark Selic will be cut to 7.75 percent this year, yields on interest-rate futures contracts indicate.

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