February 7, 2019 / 8:40 PM / 7 months ago

Brazil markets, central bank converge on 'lower for longer' rates view

BRASILIA, Feb 7 (Reuters) - Brazilian financial markets’ and the central bank’s views on interest rates are beginning to converge: Rates will likely remain at record lows all year, with social security reform being the biggest single risk to a move in either direction.

The central bank’s statement accompanying the unanimous decision on Wednesday to keep rates on hold at 6.50 percent struck a cautious tone. Although the “asymmetry” of risks still points to an eventual rise, the tightening bias is softening.

Interest rate traders have been far more dovish and still see no change this year, but they softened their easing bias on Thursday. January 2020 futures contracts nudged up to 6.50 percent, wiping out the 15 basis-point easing they had implied all week in the biggest one-day rise since October.

Meanwhile, some of the reform-fueled optimism that lifted the Brazilian real to a three-month high last week also weakened on Thursday. The currency fell for a fifth straight day, and was on course for its worst week since November.

None of these moves alone are particularly big, but together they reflect a pause in Brazil’s market rally, serve as a reminder that pension reform will be fraught and are a nod to the central bank’s reluctance to rock the boat, said analysts.

“The central bank and markets appear to be converging, but this will depend on whether pension reform is approved,” said Julio Hegedus Netto, chief economist at Lopes Filho & Associados.

“If it isn’t, we could well have a reversal,” he said.

The size, shape and scope of the government’s plan to overhaul Brazil’s social security system, which Economy Minister Paulo Guedes said could save the state around 1 trillion reais ($270 billion) in a decade, is still to be determined.

Guedes said on Thursday that various options will be put to President Jair Bolsonaro as soon as he recovers from surgery he had last week. Guedes said the measures they are examining will form a comprehensive package.

The newly elected speaker of the lower house, Rodrigo Maia, said this week that pension reform will be the first item on Brazil’s legislative agenda and could be approved in both chambers by July.

That is later than some traders had hoped for, contributing to the reversal in Brazilian rates and currency markets on Thursday and bringing traders and the central bank that little bit closer together. ($1 = 3.7166 reais)

Reporting by Jamie McGeever; editing by Jonathan Oatis

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