Sao Paulo Traders Clash With Morgan Stanley Over Rates Outlook

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With Brazil facing the worst inflation in a decade, analysts and traders alike are largely convinced the nation’s central bank will need to raise interest rates and keep borrowing costs at elevated levels through at least year end.

Morgan Stanley and Banco Santander disagree. Forecasters there say the economy’s increasingly precarious state -- it’s now headed for its deepest contraction in a quarter-century -- means policy makers will have little choice but to reduce borrowing costs sometime this year. Among the 17 banks surveyed by Bloomberg, they’re the only two forecasting a cut.

“I see them starting to signal to the market in the second half of this year that rates can be cut,” Tatiana Pinheiro, a senior economist at Santander, said from Sao Paulo.

The rate-cut calls underscore the deepening malaise afflicting Latin America’s biggest economy as the government seeks to cut spending and trim debt to avoid a junk downgrade. Analysts in a central bank survey have scaled back their median forecast for Brazil’s economy every week this year except one and now expect it to shrink 1.01 percent in 2015.

That would be the worst since 1992.

The central bank’s press office didn’t return telephone and e-mail messages seeking comment on the outlook for rates.

Central bank President Alexandre Tombini boosted the key Selic rate to 12.75 percent last month to tame annual inflation running at an 11-year high of 8.13 percent. It was the bank’s fourth straight increase.

‘Remain Vigilant’

Price increases in the 12 months through mid-April reached 8.22 percent, the national statistics agency said on Friday. Swap rates on the contract maturing in January 2017 rose 0.11 percentage point to 13.13 percent at 1:54 p.m. in Sao Paulo.

Tombini said Tuesday the inflation outlook hasn’t improved enough to allow policy makers to lower their guard.

“It’s necessary for monetary policy to remain vigilant,” Tombini said.

With inflation nowhere near the 4.5 percent midpoint of Brazil’s target, swaps traders and economists surveyed by the central bank predict the Selic will end the year at 13.25 percent.

Santander’s Pinheiro sees the central bank cutting rates starting in October and ending 2015 with the benchmark at 11.75 percent. Morgan Stanley’s Brazil economist Arthur Carvalho said in an April 12 report that he expects the central bank will lower the rate to 12.5 percent by year-end. He was unavailable to comment, according to the bank’s press office by e-mail.

“Despite the high current inflation, the central bank will cut rates in late 2015, as the recession will be already pretty clear,” Carvalho said in a report on April 12.

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