Brazil 2010 Rate Increases May Be Over, Futures Show

Brazilian traders are betting for the first time that central bank President Henrique Meirelles may be done raising borrowing costs in 2010 after consumer prices climbed at the slowest pace in four years.

Yields on interest-rate futures due in January sank 53 basis points, or 0.53 percentage point, in the past month to 10.78 percent. The level implies traders are no longer predicting a full 25-basis-point increase in the benchmark lending rate by year-end to 11 percent, according to data compiled by Bloomberg.

Inflation eased to the lowest two-month rate since 2006 in June and July while industrial production declined in June, signaling the expansion in Latin America’s biggest economy is losing steam. Brazil may be growing at a “sustainable” level, helping curb price increases, the central bank said in the minutes of its July 20-21 meeting, when it raised interest rates by a less-than-forecast 50 basis points to 10.75 percent.

“They are done for the rest of the year,” said Marina Santos, chief economist at hedge fund Squanto Investimentos LTDA in Sao Paulo and one of three analysts in a Bloomberg survey of 51 forecasters to correctly predict the central bank’s rate decision last month. “Inflation is decelerating and we are entering a new phase of growth closer to the long-term trend. The central bank can afford to wait and see.”

Yields on the January contracts fell as low as 10.77 percent on Aug. 6, suggesting traders bet the benchmark rate will be at 10.97 percent by year-end, data compiled by Bloomberg show. In February, traders predicted a year-end rate of about 12.35 percent, according to data compiled by Bloomberg.

Central Bank Survey

Analysts expect policy makers to raise the benchmark Selic rate to 11 percent during their two-day meeting that starts Aug. 31, down from a week earlier prediction of 11.25 percent, according to the median forecast in an Aug. 6 central bank survey of about 100 economists published today. The overnight rate will be kept unchanged throughout the year following the next meeting, the survey said.

Speculation the central bank may have raised borrowing costs for the last time this year is mounting in part because consumer prices, as measured by the benchmark IPCA index, rose 0.01 percent in July after remaining unchanged in June. The annual inflation rate slid to a six-month low of 4.6 percent, helping preserve the value of bonds’ fixed payments. The central bank targets inflation of 4.5 percent.

Industrial output fell 1 percent in June from the previous month as policy makers withdrew stimulus measures after the economy grew 9 percent in the first quarter from the year- earlier period. Retail sales probably rose 0.5 percent in June after increasing 1.4 percent in May from the previous month, according to the median forecast of 10 economists in a Bloomberg survey. The sales report is scheduled to be released on Aug. 11.

‘Done Hiking’

“The central bank is done hiking,” said Marcelo Carvalho, head of the Latin American economic research at BNP Paribas in Sao Paulo. “The data flow on growth and inflation suggest the central bank is going to pause sooner than later. This is what the yield curve is pricing now.”

The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. securities narrowed two basis points to 206 at 8:05 a.m. New York time, according to JPMorgan Chase & Co. It touched 200 on Aug. 4, the lowest level since May.

Credit-Default Swaps

The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps fell three basis points last week to 114, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The real rose 0.2 percent to 1.7581 per dollar, narrowing its decline this year to 0.7 percent.

Brazilian economists lowered their forecast for year-end inflation to 5.19 percent in the central bank survey published today from 5.45 percent four weeks earlier. The economy will grow 7.12 percent this year, the fastest pace in two decades, according to the survey.

Marcelo Salomon, an economist at Barclays Plc in New York, said Meirelles would have to raise the key rate by 50 basis points at the September meeting and another 25 in October to bring down the inflation rate to the central bank’s target. Meirelles, 64, has boosted the rate 200 basis points this year.

‘Soft Patch’

“They’re seeing this soft patch of activity data as a new trend, but they could resume in the near future if they see the need,” Salomon said.

The central bank doesn’t comment on analysts’ opinions, said an official in the bank’s press office.

At 11.58 percent, yields on futures contracts due in January 2012 suggest traders are betting the central bank will resume increases next year to bring the overnight rate target to about 12.5 percent by December 2011, according to data compiled by Bloomberg.

Policy makers said in the minutes released on July 29 that slowing growth in the U.S. and China, Brazil’s biggest trading partners, is also contributing to the drop in inflation. Companies in the U.S. hired fewer workers than forecast in July, a Labor Department report showed on Aug. 6.

“There are too many uncertainties in the world economy,” said Squanto Investimentos’ Santos. “Central bankers around the world are more cautious. Slower global growth helps contain Brazil’s inflation.”