Brazil Impeachment Talk Has Traders Calling End to 14.25% Rate

  • Rousseff is likely to face impeachment proceedings next month
  • Traders now predicting Brazil will cut rates this year

Traders are betting the likelihood of a new president in Brazil will also mean a change in the nation’s interest-rate policy.

For the first time, the swaps trading shows that investors expect the central bank will begin cutting borrowing costs this year. Policy makers have boosted the benchmark Selic rate by 7 percentage points since 2013 to a nearly 10-year high of 14.25 percent.

The shift comes as President Dilma Rousseff is likely to face impeachment by early May, potentially paving the way for a new government to restore Brazil’s ailing finances. That could give the central bank the ability to trim rates to help pull the economy out of its deepest recession in more than a century, according to Luiz Eduardo Portella, a trader and partner at Modal Asset Management.

“There’s space to knock down interest rates,” he said from Rio de Janeiro. “The only thing preventing that is the fiscal trajectory, which is very bad.”

The central bank declined to comment on market speculation.

Traders now see the central bank cutting rates by a full percentage point to 13.25 percent this year. It hasn’t reduced borrowing costs in almost four years.

Slowing inflation will also bolster the central bank’s ability to lower the benchmark in 2016. In the 12 months through mid-March, the inflation rate in Latin America’s biggest economy fell to 9.95 percent from 10.84 percent. The drop was bigger than that forecast by all analysts surveyed by Bloomberg.

Economists surveyed by the central bank have lowered their 2016 inflation forecast for three straight weeks to 7.31 percent. Market forecasts have been declining due to economic activity and a stronger currency, and the trend is expected to continue, Finance Minister Nelson Barbosa said Tuesday in a congressional committee. Inflation falling below 7 percent this year is “no longer a remote possibility; it’s now likely,” he said.

“We believe that to the degree current inflation remains low, that will bring about a fall in inflation expectations that will open space for the central bank to cut interest rates this year,” said Sergio Goldenstein, a money manager at FLAG Asset Management and former head of the central bank’s open-market operations department.

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