Brazil Swap Rates Rise on Signal Cuts Ending; Real Strengthens

Brazil’s swap rates climbed the most in two weeks as the central bank signaled a yearlong easing of borrowing costs may have come to an end, prompting traders to pare bets on a reduction in October.

Policy makers led by President Alexandre Tombini reduced the target lending rate yesterday by a half-percentage point to 7.50 percent, as forecast by all 60 economists surveyed by Bloomberg. If there is room for an additional adjustment, it “should be carried out with maximum parsimony,” the central bank said in a statement.

“The market was divided between another 25 or 50 basis point cut in October, and now the debate is going to be between zero and 25 basis points,” Luis Otavio de Souza Leal, the chief economist at Banco ABC Brasil SA, said by phone from Sao Paulo. “The plan of the central bank seems to be to stabilize the rate.”

Swap rates on contracts due in January 2014 climbed eight basis points, or 0.08 percentage point, to 7.83 percent, the biggest increase since Aug. 16 on a closing basis. They have fallen two basis points in August. The real appreciated 0.1 percent to 2.0484 per dollar and has risen 0.4 percent this month.

Brazil’s government will keep taking action to weaken the real to help local manufacturers in 2013, Finance Minister Guido Mantega said today in Brasilia.

The real is “consolidating” at a level weaker than 2 reais per dollar thanks to the government’s policy to stem its advance as other countries try to gain an advantage by devaluing in a currency war, Mantega said.

Weaker Real

The currency has declined 8.9 percent against the greenback in 2012, the biggest drop among the dollar’s 16 most-traded counterparts tracked by Bloomberg.

Brazil will seek growth of 4.5 percent in 2013, Mantega said. The government’s 2013 budget has room to grant new tax cuts worth 15.2 billion reais ($7.4 billion), he said today.

The Treasury sold 5 million of 5.3 million of zero-coupon bonds, known as LTNs, in an auction today, according to a statement on its website. The government sold 3.99 billion reais of securities maturing in 2014 and 2016. It rejected all bids for bonds maturing in 2013.

The central bank has lowered borrowing costs nine times since last August to revive economic growth that was half the annualized pace of the U.S. in the first quarter and is trailing Russia, India and China -- its peers in the BRIC group of major emerging markets.

President Dilma Rousseff’s administration has cut taxes to spur the sale of cars and home appliances, incentives that were extended yesterday by as much as four months.

Goldman Sachs View

Goldman Sachs Group Inc. said in a research note that the central bank statement, coming as the inflation outlook worsens and tax breaks spur “strong” demand for durable goods, indicates that policy makers will probably leave the target lending rate unchanged going forward.

Nomura Holdings Inc. raised its target lending rate forecast for the end of 2013 to 9.50 percent today, from a previous 7.25 percent, citing in a research note a pickup in inflation caused by the government.

The central bank “is being too optimistic about how much this will result in growth, and how much in inflation,” wrote Tony Volpon, the head of emerging-markets research for the Americas at Nomura. Higher inflation “will be the unfortunate end result of the present policy mix, especially taking into account the supply shocks hitting the economy and the present policy of virtually pegging the BRL to ‘help out industry.’”

Inflation Pickup

Brazil’s prices as measured by the IGP-M index rose 1.43 percent in August, the biggest increase since November 2010, the Rio de Janeiro-based Getulio Vargas Foundation said on its website today. The gauge gives producer prices a 60 percent weighting; consumer prices, 30 percent; and constructions costs, 10 percent.

The central bank has blamed a supply shock stemming from crop losses for the price increases. Tombini reiterated Aug. 17 that annual inflation will slow toward the bank’s 4.5 percent target by the end of the year even as growth picks up.

While the tone of the central bank’s statement was “more hawkish than expected,” the central bank still left the door open for another 25 basis point cut in October, Enestor dos Santos, a senior economist at Banco Bilbao Vizcaya Argentaria SA (BBVA), wrote in a note to clients.

Brazil’s consumer-loan default rate rose in July to match a 30-month high in May, renewing concern that the country’s credit-driven growth could falter.

The consumer default rate increased to 7.9 percent from 7.8 percent in June, the central bank said in a report distributed today in Brasilia. The company loan default rate was unchanged at 4 percent.

To contact the reporters on this story: Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net; Matthew Malinowski in Santiago at mmalinowski@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Joshua Goodman at jgoodman19@bloomberg.net

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