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Investors bet Brazil will speed pace of rate cuts
November 9, 2011 / 7:11 PM / 6 years ago

Investors bet Brazil will speed pace of rate cuts

* Chance of 75 basis-point cut in Nov. rises to 57 pct

* Yields on rate contracts plunge as outlook worsens

* Controversial Aug. rate cut may be winning new converts

By Alonso Soto and Jeb Blount

BRASILIA/RIO DE JANEIRO, Nov 9 (Reuters) - Investors raised their bets on Wednesday that Brazil’s central bank will make faster and deeper cuts in the country’s benchmark interest rate in coming months, to shield the country from a slowing domestic economy and fallout from Europe’s debt crisis.

Brazil’s overnight interest-rate futures contract for January 2013 settlement , the most traded interest-rate future on Sao Paulo’s BM&FBovespa exchange, slipped 17 basis points, its biggest one-day drop in more than a month, to 9.95 percent, an all-time low. A basis point is 0.01 percentage point.

This and lower yields on other rate contracts suggest that there is now a 57 percent chance that the central bank will cut its benchmark rate by 75 basis points to 10.75 percent on Nov. 30, according to Thomson Reuters. On Tuesday, the probability was 9 percent .

The chance of a 50-basis-point cut has fallen to 43 percent from 91 percent. A 50-basis-point cut is the same as the median estimate of more than 100 economists polled last week by the central bank.

The rising probability of a larger cut shows that some investors now accept the central bank’s controversial and surprising decision late in August to cut the Selic ratehalf a percentage point even as inflation lingered above target levels since April. The bank justified the move, citing a deteriorating economic scenario locally and abroad.

“The market appears to be coming around to the central bank’s point of view,” said Alberto Ramos, Latin America economist with Goldman Sachs in New York.

Investors’ bet on a bigger cut comes two months after the surprise Selic reduction -- the first in 18 months.

When the central bank began a rate-cutting trend in August -- it cut rates another half percentage point to 11.5 percent in October -- none of the 20 economists surveyed by Reuters expected it. Yields on rate futures contracts, though, suggested the bank would cut rates by up to a quarter percentage point.

“The central bank may have been right, but it was still a big gamble, and I still criticize them for that,” Ramos said.

ITALY‘S WOES FUEL RATE-CUT BETS

Brazil’s economy is expected to expand 3.2 percent in 2011, according to a central bank weekly survey of economists, down from 7.5 percent in 2010 -- the fastest pace of growth in 24 years. The bank sees growth at 3.5 percent in 2012.

Today’s decline in interest-rate futures comes as Italy’s increasingly unsustainable debt helps fuel the spread of a European debt crisis that began in Greece and other smaller countries to some of the euro zone’s largest members.

Preventing this from hurting Brazil will dominate central bank thinking, said Tony Volpon, chief Latin America economist at Nomura Securities in New York.

The central bank and government are “convinced that the current negative external scenario will be long-lasting, and thus likely to be ultimately larger than any lingering inflationary pressures,” he said in a note to clients.

The central bank, and increasingly, investors, believe the slowing Brazilian and world economies will control inflation by pushing down commodity prices and squeezing excess demand out of the economy.

As Europe, China’s biggest customer, slows, China’s demand for commodities will fall, reducing prices for Brazil’s key commodities exports, including iron ore, soybeans, oil and sugar.

Brazil’s inflation is seen slowing to 0.41 percent in October from 0.53 percent the previous month, according to the median view of 20 economists polled by Reuters.

“A spike in worries concerning Italy was crucial to today’s rate-futures move.” said Diego Donadio, Latin America strategist with BNP Paribas in Sao Paulo. “Problems in Europe are worsening the global growth scenario that could ultimately be reflected in the local economy.”

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