UPDATE 3-Banks bet on Brazil rate cuts despite cenbank minutes

Thu Dec 6, 2012 2:40pm EST

* Barclays, Citi, Santander, Itau BBA see rate cuts in 2013
    * Central bank minutes little changed from prior meeting
    * Bank reiterates "stability of monetary conditions"
    * Economic recovery seen more intense in 2013 - Copom


    By Silvio Cascione
    SAO PAULO, Dec 6 (Reuters) - Several banks on Thursday bet
that Brazil would see even lower interest rates, even as the
central bank reiterated its willingness to leave them unchanged
for a long time.
    In the minutes of its last policy meeting, when it left the
its Selic benchmark interest rate unchanged at a record low of
7.25 percent, the bank repeated that stability will be the best
strategy going forward.
    The decision was taken before the government reported on
Friday very disappointing economic growth of 0.6 percent in the
third quarter - just half the pace expected by
financial markets. 
    The bank did not make reference to the meager economic
performance in the minutes. Still, the document was followed by
a wave of forecast revisions.
    Analysts at Barclays and Itaú BBA cut their end-2013 Selic
forecasts to a new low of 6.25 percent, while Citigroup trimmed
its estimate to 6.5 percent. On Wednesday, Banco Santander
Brasil had cut its forecast to 6.25 percent too.
    "Even acknowledging that Copom is currently signaling the
intent to keep Selic on hold for a while, our take is that they
will eventually change their activity outlook as soon as
fourth-quarter GDP proves to show another weak (below potential
pace) performance," wrote Citi's analysts Marcelo Kfoury and
Leonardo Porto in a research note.
    Before last week's decision to keep the Selic rate
unchanged, the central bank had cut it ten times in a row to
help President Dilma Rousseff boost a flagging economy. The rate
cuts came to an end as the inflation outlook for 2013 started to
become a concern. 
    "If in between the end of this year and the first quarter of
the next one we start to forecast economic growth below 3
percent in 2013, then the conditions for further rate cuts would
be in place," said Carlos Kawall, chief economist at J. Safra
Corretora and a former government official. 
    "I'm not expecting cuts now, but the risks of a cut are
higher than for a rise."
    Yields on interest rate future contracts in Brazil 
fell, suggesting that traders also believe the bank could cut
rates again in 2013. 
    It won't become clear how many other banks are following
suit and lowering their interest rate forecasts until Monday,
when the central bank releases its weekly poll of economists. 
    
    At its Nov. 28 meeting, the bank's Monetary Policy
Committee, known as Copom, also reiterated its expectations that
 economic activity will pick up next year, when the lagging
effects of the interest rate cuts will boost domestic demand.
    There was little change from the previous meeting's minutes.
The committee led by central bank President Alexandre Tombini ,
however, did remove a reference, present in the prior minutes,
to "rising" business and consumer confidence.
    Although it did retain the language that indicated both
business and consumer optimism remained elevated.
    The committee also inserted a reference to "moderating
prices" of some "real and financial assets," without
elaborating. 
    "One possible interpretation here is an additional focus on
the currency. In our opinion, it signals that a weaker real
would add noise to the monetary policy management moving
forward," wrote David Beker, chief Brazil economist and fixed
income strategist at Bank of America Merrill Lynch.
    The bank said the fulfillment of the inflation target next
year assumes the government meeting its debt-reduction targets -
in the form of the so-called primary budget surplus. Most
analysts in a recent Reuters poll said such a scenario is
unlikely. 
    Brazil's central bank targets inflation at 4.5 percent, with
a leeway of plus or minus 2 percentage points. Economists have
said policymakers are tolerating it to remain above the center
of the target though, between 5 and 6 percent, as they try to
stimulate economic growth.