Brazil Central Bank Said to Rule Out Aggressive Interest Rate Cuts for Now

Brazil’s central bank sees no need to cut interest rates as aggressively as it did after the collapse of Lehman Brothers Holdings Inc. in September 2008, a government official familiar with monetary policy said.

The official, who asked not to be identified because he isn’t authorized to discuss monetary policy, dismissed speculation that policy makers are aiming to bring the benchmark rate to 9 percent next year at the urging of President Dilma Rousseff. Moderate rate cuts are more appropriate because policy makers are acting quickly and don’t expect the European debt crisis to be as deep as the 2008 global credit crunch, he said.

Yields on interest-rate futures contracts jumped as traders pared bets that the central bank will accelerate the pace of rate cuts after reducing the Selic rate by half-point to 12 percent on Aug. 31. Brazil was the second Group of 20 nations after Turkey to slash interest rates in response to slower global growth. The cut came a day after Rousseff vowed to take Brazil on a “new pathway” of lower borrowing costs.

Rousseff last week said that unlike the period immediately following Lehman’s bankruptcy, when the central bank waited four months to begin slashing the benchmark rate, Brazil can’t miss the opportunity provided by the current global slowdown to lower borrowing costs that are the highest in the G-20. The government wants the Selic rate to fall to 9 percent next year, newspaper Estado do S. Paulo reported Oct. 2, citing three government officials that it didn’t identify.
Yields Rise

The yields on the contract due in January 2013, the most traded in Sao Paulo, rose 14 basis points, or 0.14 percentage point, to 10.28 percent at 11:30 a.m. New York time. Yesterday, the January 2013 yield fell as much as 29 basis points to 10.04 percent, the lowest since June 2007. The real rose 0.6 percent to 1.8803 per U.S. dollar.

“Markets tried yesterday to embrace the view of a 75 basis point cut this month,” Jorge Dib, portfolio manager at Grau Gestao de Ativos, said in a phone interview from Sao Paulo. The rise in yields today is being driven by speculation that the central bank doesn’t plan an aggressive rate cut, he said.

Deeper cuts in the interest rate, as adopted in 2009, would only be required if the European debt crisis culminated in a sovereign default or bankruptcy of a bank in the Euro zone, the official said.
‘Moderate’ Cuts

The central bank in its quarterly inflation report published Sept. 29 said it planned to carry out “moderate” interest rate cuts to shield Latin America’s biggest economy from the European debt crisis, adding that the strategy was consistent with bringing inflation back to the 4.5 percent target in 2012.

A day later, Rousseff said the government’s effort to contain spending is giving the central bank leeway to begin a “cautious” and “responsible” cycle of rate reductions.

Traders saw yesterday “political pressure from the government on the central bank, so the speculation that the central bank may accelerate rate cuts returned,” Solange Srour, chief economist at BNY Mellon ARX Investimentos, said in a telephone interview from Rio de Janeiro.

“I still work under the hypothesis that interest rate decisions are made by the central bank,” Paulo Leme, head of emerging markets at Goldman, Sachs & Co. in Miami, said in a phone interview.
October Reduction

Leme, who expects policy makers to reduce the benchmark interest rate to 11.5 percent this month, said he gives more weight to the central bank’s last inflation report than to Rousseff’s comment.

On Sept. 10, 2008, five days before Lehman Brothers filed for the largest bankruptcy in history, Brazil’s central bank raised its benchmark rate to 13.75 percent, the highest in almost two years. Policy makers, led by then bank chief Henrique Meirelles, kept the rate unchanged until January, when they slashed it by 100 basis points.

By July 2009, the Selic was at a record low 8.75 percent and inflation had slowed to 4.5 percent from 6.25 percent in September 2008. Inflation through mid-September of this year accelerated to 7.33 percent, a six-year high, and analysts expect the bank to fail in its attempt to bring the pace of price increases down to target next year.

The credit squeeze following Lehman’s collapse led Brazil’s economy to contract in 2009 for the first time in 17 years. Analysts now expect the economy to expand 3.7 percent in 2012, up from 3.5 percent this year, according to the median estimate in a central bank survey published yesterday.

The global outlook may worsen leading the central bank to accelerate the pace of interest rate cuts, Carlos Kawall, chief economist at Banco J. Safra SA, said in a phone interview from Sao Paulo. He currently expects a half-point cut this month.