Tags: Brazil | World | Biggest | Rate | Cut

Brazil Seen Making World’s Biggest Rate Cut

Tuesday, 27 Sep 2011 09:27 AM

Traders are betting Brazilian central bank President Alexandre Tombini will cut interest rates by the most in two years to shield the economy from a European banking crisis that is hurting global growth.

The yield on rate futures due November fell 64 basis points in the past month to 11.59 percent, indicating investors expect policy makers to reduce the benchmark Selic rate by 75 basis points at their meeting on Oct. 19 after a surprise 50-point cut last month. The central bank lowered the rate 100 basis points, or 1 percentage point, in June 2009. The Bank of Israel unexpectedly trimmed its key rate yesterday for the first time in 2 1/2 years.

Brazil became the second country in the Group of 20 after Turkey lowered rates last month as policy makers signaled they were more concerned about the global slowdown than quickening inflation in Latin America’s biggest economy. The prospect of more cuts prompted economists in a central bank survey last week to forecast inflation will breach the 6.5 percent upper limit of the government’s target for the first time since 2003.

“The market is pricing in the possibility of the situation in Europe worsening,” Paulo Leme, an economist at Goldman Sachs Group Inc., said in a telephone interview from Miami. “If the situation in Europe is not solved by October, you will have much deeper interest-rate cuts.”

More than $3.5 trillion was erased from global equity markets last week as concern mounted the crisis in Europe may cause the banking system to seize up and send the world economy into a recession. Commodity prices, as measured by the Standard & Poor’s GSCI Spot Index, have slid 8.7 percent in the past month and reached the lowest level since December 2010.

‘Substantial Deterioration’

Brazil’s central bank said yesterday in an e-mailed statement that it doesn’t comment on market moves.

Policy makers said in the minutes of their Aug. 31 meeting that a “substantial deterioration” in the global economy may be “prolonged,” slowing trade, investment and credit flows to Brazil. The central bank lowered the overnight interbank lending rate, known as Selic, a half point to 12 percent at that meeting after raising it at the previous five policy meetings.

Inflation quickened to 7.33 percent in the year through mid-September, exceeding the upper limit of the government’s target range for a fifth straight month. Brazil targets inflation of 4.5 percent, plus or minus two percentage points. With the benchmark interest rate at 12 percent, the real rate has declined to 4.67 percent, from 5.49 percent in May.

‘Mistrust’

Traders and analysts have raised their expectations for inflation since the rate cut. Consumer prices will rise 6.52 percent this year, according to the median forecast in a Sept. 23 central bank survey of about 100 analysts. They forecast 6.31 percent two months ago. The yield gap between two-year inflation-linked bonds and fixed-rated securities, a gauge of investors’ expectations for price increases, jumped to 6.53 percentage points on Sept. 21, the highest since October 2008.

The market seems to have “a mistrust in relation to the government’s commitment to the inflation target,” Zeina Latif, a Latin America economist at RBS Securities Inc, said in a telephone interview from Sao Paulo. “The government apparently seems inclined to use the leeway it has in the target range to avoid an undesired slowdown of the economy in the short term.”

Carlos Thadeu de Freitas Gomes Filho, chief economist at Franklin Templeton Investments in Sao Paulo, said analysts are too concerned with inflation and not paying enough attention to the global outlook.

Central bankers “are concerned about the global scenario and they are forward looking,” Gomes Filho said in a telephone interview. “Economists are backward looking, focusing too much on inflation inertia, instead of what will happen next year. We are not as pessimistic and concerned. Other central banks around the world are doing so. We are not an isolated case.”

Israel Cut

Bank of Israel Governor Stanley Fischer cut the benchmark interest rate by a quarter point to 3 percent yesterday, surprising 20 of 22 economists surveyed by Bloomberg who had forecast no change. The Federal Reserve lengthened the holdings of its bond portfolio this month to lower borrowing costs. Central banks from Chile to Mexico have also indicated they may cut interest rates if global growth slows further.

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries fell two basis points to 281, according to JPMorgan Chase & Co.

The cost of protecting Brazilian bonds against default declined eight basis points yesterday to 195, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Real’s Plunge

Yields on Brazil’s real-denominated bonds due in 2021 fell 28 basis points yesterday, to 11.66 percent, according to data compiled by Bloomberg.

The real rose 0.5 percent to 1.8242 per dollar yesterday. The real has lost 12.9 percent this month, prompting the central bank last week to step into the futures market for the first time in two years to prop up the currency.

The decline in the real has also fueled concern import prices may climb, exacerbating the inflation pick-up. The central bank estimates that a 1 percent decline in the real over three months will add about 0.03 percentage point to the consumer price index, according to the June quarterly inflation report.

Goldman Sachs’s Leme expects the central bank to cut the interest rate by 50 basis points in each of its next two meetings. He forecasts inflation will slow to 6.6 percent by December and to 5.5 percent next year.

“The central bank’s moves imply a very pessimistic view of the global economy,” Leme said.

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Traders are betting Brazilian central bank President Alexandre Tombini will cut interest rates by the most in two years to shield the economy from a European banking crisis that is hurting global growth.The yield on rate futures due November fell 64 basis points in the past...
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2011-27-27
Tuesday, 27 Sep 2011 09:27 AM
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