UPDATE 2-Brazil consumer prices fall, pushing yields lower

* Brazil’s IPCA inflation index falls 0.09 pct to mid-July

* Twelve-month inflation slows to 4.74 percent

* Yields on interest rate futures fall across the board
(Recasts, adds comments, byline)

By Luciana Lopez and Vanessa Stelzer

SAO PAULO, July 20 (BestGrowthStock) – Consumer prices in Brazil
unexpectedly dropped in the month to mid-July, with data
pointing to a slowdown in Latin America’s largest economy on
the eve of a central bank interest rate decision.

Brazil’s benchmark IPCA inflation index (BRIPCA=ECI: ) fell
0.09 percent in the month to mid-July, compared with a 0.19
percent gain in the month to mid-June, the government’s
statistics agency IBGE said on Tuesday.

The surprise tumble in prices bolsters the view that the
economy — which many had recently fretted was in danger of
overheating — is slowing considerably from its booming pace of
the first quarter.

Thus, the central bank does not need to raise borrowing
costs quite so aggressively when it announces a new lending
rate after markets close on Wednesday.

Yields on Brazilian interest rate futures contracts
(0#DIJ:: ) dropped shortly after the new inflation data, as
investors bet on a smaller rate hike than previously seen.

The yield on the January 2011 (DIJF1: ) contract, the most
actively traded, slid to 10.98 percent from 11.05 percent.

Analysts surveyed by Reuters had expected the IPCA to rise
0.05 percent, with the 17 forecasts ranging from 0.02 percent
to 0.10 percent.

As other economic indicators, including June inflation,
retail sales and industrial production, have also pointed to a
more moderate pace of economic expansion, pressures have eased
on the central bank to raise borrowing costs to try to rein in
prices.

RATE HIKE STILL LIKELY

But investors still expect a rate hike, even if smaller, as
the core inflation rate rose slightly from the month before.
So-called core inflation smooths out particularly volatile
prices, such as food, which can be dependent on the weather or
other unpredictable factors.

“I think it’s hard for the central bank to decide on a
smaller hike, because indicators such as employment, credit and
household income remain strong,” said Flavia Cattan-Naslausky
of RBS Securities.

But the lower prices “could be an indication that the bank
could stop tightening earlier. In other words, do 75 basis
points now, and then signal a drop in the pace of monetary
tightening,” she added.

Policymakers have so far brought the benchmark Selic rate
to 10.25 percent this year from a record-low 8.75 percent,
putting Brazilian interest rates among the world’s highest.

The central bank uses an inflation target as a guide when
setting rates — this year, at 4.5 percent, plus or minus 2
percentage points.

In the 12 months to mid-July the index rose 4.74 percent,
compared with 5.06 percent in the year to mid-June and 4.84
percent in the 12 months through the end of June.

The drop in consumer prices through mid-July was led by
food prices, which fell 0.80 percent from mid-June, after
having risen sharply earlier this year on rough weather.
Transportation costs also fell.

In contrast, housing costs and personal expenses both rose
from the previous month.

The IPCA-15 tracks consumer prices from around the 15th of
one month to the 15th of the next. The index also sets the
value of tens of billions of dollars of Brazilian
inflation-indexed government bonds.

For details on Brazilian inflation by sector and regions,
please go to:
http://www.ibge.gov.br/home/presidencia/noticias/noticia_visualiza.php?id_noticia=1670&id_pagina=1

Stock Market Research

(Additional reporting by Guillermo Parra-Bernal, Editing by W
Simon )

UPDATE 2-Brazil consumer prices fall, pushing yields lower