Brazil Central Bank May Signal Rate Cut Coming Soon: Week Ahead

By Francisco Marcelino and Andre Soliani
Dec. 15 (Bloomberg) -- Brazil’s central bank may signal this week it’s ready to cut interest rates from a two-year high, betting the slowing economy will help rein in consumer prices.
Economists expect policy makers to use the minutes of their board meeting last week, to be disclosed Dec. 18, to explain why they voted unanimously to keep the benchmark rate at 13.75 percent after discussing “the possibility of lowering” it.
“They’ll probably report the bad economic activity figures for the fourth quarter and how it changes the outlook for inflation,” Guilherme da Nobrega, chief economist at Itau Corretora de Valores SA, said in a telephone interview from Sao Paulo. “Investors will probably continue to read into the minutes that a cut will happen in January.”
While inflation has been running above the country’s 4.5 percent target for almost a year, the economic growth outlook for 2009 keeps worsening. Morgan Stanley last week lowered its forecast for Brazil’s economic growth next year to zero from a prediction of 2 percent.
“The central bank’s concern is shifting from inflation to growth,” said Nobrega.
Yields on the most-trade interest-rate futures contract, which is due January 2010, tumbled last week below 13 percent for the first time since March.
Brazilian companies such as Vale do Rio Doce SA, the world’s biggest iron-ore exporter, are cutting jobs. Vale fired 1,300 employees and placed 5,500 on paid leave. Brazil’s industrial output growth slowed more than economists forecast in October.
To be sure, consumer prices as measured by the benchmark IPCA price index rose 6.39 percent in the 12-months through November, nearing the 6.5 percent upper end of the bank’s tolerance margin around its inflation target.
“The minutes must give investors some direction on when the cuts will take place,” said Marcelo Voss, chief economist at Liquidez Corretora, who expects Brazil’s interest rate to fall to 13 percent by the end of next year.
Markets
Last week, the real strengthened 1.6 percent to 2.3941 per dollar. The yield on the government’s zero-coupon bond due January 2010 fell 0.53 percentage point to 12.89 percent.
The benchmark Bovespa index rose 11 percent to 39,373.86 points. Pulp maker Votorantim Celulose e Papel SA was the biggest gainer after jumping 38 percent. The biggest loser was ALL America Latina Logistica, a logistics company, with a 9.4 percent decline.
The following is list of events in Brazil this week:
Event Date Retail Sales, October 12/16 COPOM Policy Minutes 12/18 Long Term Rate - TJLP 12/18 Unemployment Rate 12/19 IPCA-15 Inflation, December 12/19 Current Account 12/19 Foreign Investments 12/19