Brazil rates fall on expected energy cost cuts

RIO DE JANEIRO: Brazil's interest-rate contracts reversed early gains on Wednesday after Reuters reported that President Dilma Rousseff, in an attempt to rein in inflation, will unveil larger-than-expected cuts in the country's energy bills.

Rousseff will cut energy fees for households by an average 18.5 percent, while industrial consumers will benefit from reductions of up to 34 percent, according to a government source, who said the official announcement will be made later on Wednesday.

The figures compare with previously announced reductions of an average 16 percent and of up to 28 percent, respectively.

Concerns that inflation could near the ceiling of a government target have been driving up Brazil's interest-rate futures, despite central bank pledges to keep the base Selic rate at an all-time low of 7.25 percent for a "prolonged period."

Longer-dated contracts had jumped early in the session on Wednesday after Brazil reported consumer inflation that started the year well above market estimates.

Economists said the data suggested that, even if the central bank leaves the Selic unchanged this year, inflation could become a bigger problem in the medium- to longer-term.

In the afternoon, however, most rates were stable or lower. Contracts maturing in January 2014 were flat at 7.17 percent, while those expiring in January 2015 declined 1 basis point to 7.87 percent. Contracts maturing in January 2017 lost 2 basis points to 8.66 percent

"The only logical explanation is the rumor that Rousseff will increase the cut in energy fees," said Pedro Tuesta, an analyst with 4Cast in New York. "But note there is no conviction in the market because the changes are not that large."

LATAM CURRENCIES LITTLE CHANGED

Latin American currencies traded without common direction as investors awaited more clarity in the US budget negotiations, which should determine investor appetite for taking risk in emerging markets.

The Brazilian real gained 0.2 percent after finishing practically stable during the past two sessions.

The Mexican peso lost 0.3 percent, erasing part of a rally in the previous session.

After reaching its strongest level since March last week, the Mexican peso is likely to consolidate around current levels as many investors maintain long peso positions on the Chicago Stock Exchange, despite central bank threats to cut interest rates, analysts said.