Brazil Inflation Surprise Has Traders Boosting Rate-Cut Bets

  • Central bank will trim borrowing costs next month, swaps show
  • Meirelles said it’s highly probable rates will fall this year

Traders are betting that Brazil central bank President Ilan Goldfajn will preside over the nation’s first interest-rate cut in four years.

Swap rates plunged Thursday and extended declines Friday after a report showed that inflation slowed more than analysts forecast and Finance Minister Henrique Meirelles said it’s “highly probable” that benchmark borrowing costs will fall this year. The bank will chop its key Selic rate by 25 basis points at its October meeting, the contracts show. A week ago, swaps indicated policy makers would keep the rate at 14.25 percent, the same level it’s been since mid-2015.

Brazil, which has the highest interest rate among G-20 nations, finally is getting traction in its fight to contain inflation in Latin America’s largest economy. The slowdown paves the way for Goldfajn, who was appointed in May, to begin reducing borrowing costs to help spur expansion amid the country’s longest recession in more than a century.

Inflation “came in way below expected, which was very positive,” said Matheus Gallina, a fixed-income trader at Quantitas Gestao de Recursos SA in Porto Alegre, Brazil. Inflation measured by the IPCA-15 index slowed to 0.23 percent after a 0.45 percent increase a month earlier, the national statistics agency said Thursday. That was below forecasts of all 40 analysts surveyed by Bloomberg.

In a statement, the central bank said it doesn’t comment on market rumors. 

The central bank is focused primarily on inflation but also is considering government efforts to contain spending, Meirelles said in an interview in New York on Wednesday. He headed the bank during former President Luiz Inacio Lula da Silva’s eight-year tenure.

On Wednesday, Meirelles told reporters that he has always supported the central bank’s autonomy, and that any comments by him on monetary policy would be inappropriate, according to a transcript published on the ministry’s website. Earlier on Wednesday, Meirelles told Bloomberg in an interview it’s "highly probable" the benchmark interest rate will fall by year-end.

Meirelles also told reporters that congressional approval of government legislation to limit public expenditures would cause the economy’s structural interest rate to decline.

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