Brazil's Real Drops as Government Spending Cuts Fail to Reassure

  • Extends loss this week to 1% after S&P downgrade Wednesday
  • Government to freeze 23.4 billion reais of spending this year

Brazil’s real declined as investors shrugged off a government spending freeze seen as insufficient to meet this year’s fiscal goal.

The real weakened 0.3 percent to 4.0429 at 3:57 p.m. in Sao Paulo, extending this week’s decline to 1 percent.

Currency traders are growing increasingly concerned about Brazil’s fiscal accounts after the government’s inability to shrink a budget hole cost the country its investment-grade credit rating last year. Its rating was cut further into junk territory by Standard & Poor’s Wednesday as a shrinking economy and political gridlock makes investments riskier. Brazil will freeze 23.4 billion reais ($5.8 billion) of spending this year, less than the almost 80 billion reais cut in 2015, policy makers said in Brasilia on Friday.

"The market is tired of hearing different numbers from the government," said Paulo Nepomuceno, a fixed-income strategist at Coinvalores CCVM in Sao Paulo. “It’s hard to trust they will be able to achieve anything they say.”

Meanwhile, traders pared their bets for interest rates. Swap rates on the contract maturing in January 2017, a gauge of expectations for Brazil’s interest rates, declined 0.08 percentage point to 14.24 percent.

Central bank President Alexandre Tombini said Thursday on a televised interview with O Globo the recession creates deflationary pressure that will help shave about 2 percentage points off annual inflation in the first half of 2016. Annual inflation accelerated to 10.71 percent in January, more than double the official target of 4.5 percent.

Even so, the current page of consumer price increases leave little room to cut borrowing costs, Tombini said in the interview, echoing comments made earlier by the central bank’s monetary policy director, Aldo Luiz Mendes.

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