January 28, 2020 / 3:01 PM / 2 months ago

UPDATE 1-Brazil's Campos Neto says low rates prompting early debt repayment, hitting real

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By Jose Gomes Neto

SAO PAULO, Jan 28 (Reuters) - The Brazilian real's weakness is partly down to low interest rates prompting companies to pay down foreign debt early, central bank president Roberto Campos Neto said on Tuesday, adding that foreign investor outflows from Brazilian stocks reflect relative values rather than fundamental concerns.

Speaking at a Credit Suisse event in Sao Paulo, ahead of the central bank's next interest rate decision on Feb. 5, Campos Neto also said that Brazil's economy is growing gradually and monetary policy is stimulative.

Echoing remarks he made last week, Campos Neto said the next steps on rates continue to depend on economic activity and the balance of risks and outlook for inflation, although caution is warranted at this stage of the economic cycle.

The bank's rate-setting committee known as Copom slashed the benchmark Selic rate by 200 basis points to a record low 4.50% last year. Economists say that cycle is close to the end, although there may still be a 25 basis point cut next week.

The record-low Selic and decline in borrowing costs across the Brazilian curve have eroded the real's yield advantage over currencies like the dollar. According to Campos Neto, local firms are taking advantage of this to pay down foreign debt early, adding to the downward pressure on the real.

The real hit a near-two-month low of 4.23 per dollar on Monday, within sight of its 4.2770 per dollar record low. But this is not fueling an increase in inflation expectations, Campos Neto said.

The central bank's latest weekly 'FOCUS' survey of economists on Monday showed that the average 2020 inflation outlook slipped to a new low of 3.47%, further below the bank's official target of 4.00%.

Campos Neto also said foreign investors are pulling money out of Brazilian stocks because the market may be expensive relative to other markets, not because of worries over the country's economy or policy direction.

Indeed, the mix of low long-term bond yields, microeconomic reforms and falling government debt is improving the so-called monetary policy 'transmission mechanism,' he said.

The benchmark Bovespa surged 32% last year, more than double the MSCI emerging market equity index gains, and last week hit a record high 119593 points, driven by domestic buying.

Central bank figures on Monday showed that foreigners pulled a net $5.67 billion out of Brazilian stocks last year, the most since 2008. (Reporting by Jose Gomes Neto; Writing by Jamie McGeever; Editing by Alison Williams and Andrea Ricci)

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