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Urgent: Brazil Plans ‘Moderate’ Interest Rate Cuts; Futures Rise in 2012

Sept. 29 (Bloomberg) — Brazil’s central bank said it plans to carry out “moderate” interest rate cuts to shield Latin America’s biggest economy from the European debt crisis, while ensuring inflation slows in line with the target next year.

“By mitigating the effects of a more restrictive global environment in a timely manner, moderate adjustments in the basic rate are consistent with the outlook in which inflation converges to its target in 2012,” policy makers said today in their quarterly inflation report. The outlook for inflation has improved “because of the substantial deterioration of the international environment.”

Policy makers surprised economists by cutting the overnight interest rate by half a point to 12 percent in August, a day after President Dilma Rousseff vowed to take Brazil on a “new pathway” of lower borrowing costs. That prompted analysts to speculate central bank President Alexandre Tombini had yielded to political pressure. Policy makers had raised the key rate in each of their previous five meetings.

The yield on interest rate futures maturing in January 2013, the most-traded in Sao Paulo, rose six basis points to 10.47 percent at 10:47 a.m. New York time. The real strengthened 0.5 percent to 1.8309 per U.S. dollar.

“It seems there is no room for more aggressive rate cuts,” said Luciano Rotagno, chief strategist at CM Capital Markets in Sao Paulo. “‘The central bank signaled it doesn’t plan to accelerate the pace of cuts.”

Inflation Forecasts

In a speech in Curitiba today, Tombini also reiterated his pledge to bring inflation back to the 4.5 percent target in 2012 from 7.33 percent in the 12 months through mid-September.

Even as the central bank said inflation would reach the target next year, its estimates told a different story. The bank forecast consumer prices will rise 4.7 percent in 2012 and only slow to the 4.5 percent target in the second quarter of 2013, according to its reference scenario where the Selic rate stays at its current 12 percent per year.

In the market scenario, where policy makers cut the overnight rate to 11 percent by year-end, inflation exceeded the mid-point of the 2.5 percent to 6.5 percent target at least until the third quarter of 2013, the report showed.

Even when the central bank takes into account the impact of the global crisis, inflation exceeds Tombini’s target throughout the third quarter of 2013. Policy makers expect the current crisis to be more prolonged, though less intense than the 2008 credit crunch.

Inflationary Pressure

A separate report today showed inflationary pressures remain strong. Consumer, construction and wholesale prices, as measured by the IGP-M index, rose 0.65 percent this month, the biggest jump since February, the Getulio Vargas Foundation said. Analysts expected prices to gain 0.62 percent, according to the median estimate in a Bloomberg survey.

The decision to lower rates even as inflation quickens prompted analysts to forecast the central bank will miss its 4.5 percent target in 2011, 2012 and 2013. They expect consumer prices to rise 4.8 percent in 2013, according to a central bank survey of about 100 analysts published on Sept. 26.

Brazil was the second country in the Group of 20 nations after Turkey to lower interest rates to shore up economic growth. The move was followed by the Bank of Israel, which unexpectedly trimmed its key rate on Sept. 26 for the first time in more than two years.

Brazil’s gross domestic product will expand 3.5 percent this year, down from a previous forecast of 4 percent, the bank said.

Ensuring Growth

Rousseff’s pro-growth policies will ensure economic expansion of more than 3 percent this year, said Ilan Goldfajn, chief economist at Itau Unibanco Holding SA.

Tombini this week said inflation will slow to below 6.5 percent by the end of the year, while analysts surveyed by the central bank expect consumer prices to rise 6.52 percent in 2011. It would be the first time since 2003 that inflation exceeded the upper limit of the bank’s target range.

There is a 45 percent chance inflation will exceed the upper limit of the target this year, according to the central bank reference scenario.



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