Brazil Stock Traders Recoil at Volpon’s Rate Call as Real Climbs

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Brazilian shares dropped to an almost four-month low on speculation borrowing costs at Latin America’s largest economy will increase further, curbing prospects for equities. The real advanced for the first time in four days.

The Ibovespa extended this month’s slump after central bank director Tony Volpon said policy makers should keep raising interest rates until the outlook for inflation reaches the government’s target. The benchmark stock gauge has tumbled 11 percent from this year’s peak on concern the decision to boost the Selic to a six-year high to tame consumer prices will deepen an economic contraction.

“The central bank will probably increase rates again next week in a trend that’s damaging the economy and prospects for companies,” Pedro Paulo Silveira, the chief economist at brokerage TOV Corretora, said by phone from Sao Paulo.

President Dilma Rousseff is struggling to slow above-target inflation and stimulate an economy forecast to post the worst recession in 25 years. The slowdown has weighed on corporate results, with earnings at Ibovespa companies sinking by an average 36 percent in the first quarter, according to data compiled by Bloomberg.

The stock gauge lost 0.2 percent to 51,474.28 at the close of trading in Sao Paulo, erasing an advance of as much as 0.8 percent. Lenders Itau Unibanco Holding SA and Banco Bradesco SA contributed the most to the decline. The real climbed 0.8 percent to 3.1718 per dollar, leading gains among Latin American currencies.

Swap Rates

Swap rates, a gauge of expectations for changes in borrowing costs, show policy makers will boost interest rates once more in 2015. Brazil is the only member of the Group of 20 nations raising borrowing costs this year. Policy makers voted unanimously last month to lift the benchmark Selic by 0.5 percentage point to 13.75 percent.

“I personally will vote for increasing interest rates until our forecast is positively pointing to the target at the end of 2016,” Volpon said Monday in Sao Paulo. “Expectations will continue to fall, especially in 2016, but it’s still very early. We need to stabilize and consolidate this framework, so we eventually can think of monetary accommodation.”

While economists surveyed by the central bank have reduced their estimate for consumer prices next year to 5.4 percent, the projection is still above the target. The goal is for inflation of 4.5 percent, plus or minus 2 percentage points.

Budget Cuts

Credit-default swaps extended their decline after Finance Minister Joaquim Levy said Brazil’s government will make budget cuts if required as it strives to meet this year’s fiscal targets. He’s leading the efforts to reverse last year’s deficit and post a surplus before payments on interest equal to 1.1 percent of gross domestic product.

Brazilian stocks and the real slumped Monday after Levy said that a credit-rating downgrade by Moody’s Investors Service is more likely if Brazil doesn’t make economic adjustments. The Ibovespa entered a bull market in April, after rallying more than 20 percent from this year’s low, amid speculation that government action would help shore up the budget and avoid the loss of its investment-grade status.

Bradesco extended a five-day slide to 4.2 percent after Reuters reported the lender began exclusive talks to acquire HSBC Holdings Plc’s Brazilian unit.

BM&FBovespa SA, the manager of Brazil’s exchange, slumped to the lowest since May 29. Banco BTG Pactual SA cut its recommendation on the shares to neutral from buy, citing “sluggish volumes and zero improvements on the political/economic front.”

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