Brazil's unemployment rate fell to its lowest level this year, undercutting bets that policy makers will reduce borrowing costs. Yields on interest rate futures jumped.

Joblessness fell to 6 percent in July from 6.2 percent the month before, the national statistics agency said today in a report distributed from Rio de Janeiro. The rate was the lowest since December and below the 6.2 percent median of 33 estimates compiled by Bloomberg. Average real wages rose 4 percent from a year ago to 1,613 reais ($999.50) a month, the report showed.

"This wage number has left it clear that Brazil and domestic demand are still accelerating," said Andre Perfeito, chief economist at Sao Paulo-based Gradual Investimentos. "Wage growth is strong, putting into question the possibility of a rate cut."

Brazil has been adopting measures to slow the economy as job creation and rising salaries add fuel to already heated consumer demand. The central bank has raised the benchmark interest rate five times this year, pushing it to 12.5 percent, to slow inflation that this month exceeded 7 percent for the first time since 2005. Policy makers target inflation of 4.5 percent, plus or minus two percentage points.

Rising Yields

The yield on the interest rate futures contract maturing in January 2013, the most traded in Sao Paulo today, rose seven basis points, or 0.07 percentage point, to 11.44 percent as of 9:20 a.m. New York time. The real was little changed at 1.6142 per U.S. dollar, from 1.6137 yesterday.

"With this robust labor market, the central bank doesn't have space to cut interest rates in the short term," Luciano Rostagno, chief strategist at CM Capital Markets, said in an interview from Sao Paulo.

Carlos Hamilton, the central bank's director of economic policy, said on Aug. 19 that Brazil's jobs market is showing signs of an "expected moderation in activity" and that credit growth will slow to about 15 percent by the end of the year.

Brazil raised reserve and capital requirements on some loans in December, before doubling the tax on consumer credit to 3 percent in April.

Latin America's biggest economy created the fewest number of jobs last month since March, generating 140,563 registered jobs in July, down from 215,393 in June, the Labor Ministry said in a report Aug. 16. The number was lower than all 10 forecasts in a Bloomberg survey of economists. In the same month in 2010, Brazil added 181,796 jobs.

Debt Crises

In July, debt crises in Europe and the U.S. led investors to reverse bets that the central bank would continue to raise rates this year. Traders are now wagering that policy makers will cut the benchmark interest rate by as much as 75 basis points, or 0.75 percentage point, by the end of the year, and are split on whether there will be a 25 basis-point cut next week.

"The push for rate cuts in Brazil only makes sense if you want to take a view that external conditions will deteriorate much further from here," Gustavo Rangel, chief Brazil economist for ING Financial Markets in New York, said in an e-mailed report. Recent labor and credit data show that "Brazil's inflation outlook may not turn rosy anytime soon," he said.

Brazil's economic activity shrank in June for the first time since December, 2008. Industrial production fell 1.6 percent in June, the second-biggest drop in output since 2008, and business confidence in the second quarter fell to its lowest level since 2009.

Still, inflation hasn't let up this month. The inflation rate, as measured by the IPCA-15 index, rose to 7.1 percent in the 12 months through mid-August from 6.75 percent the previous month, the statistics agency said on Aug. 19

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net.

To contact the editor responsible for this story: Bill Faries at wfaries@bloomberg.net.