Brazil Swap Rates Fall as Food Staple Taxes Lowered; Real Drops

Brazil’s swap rates fell after President Dilma Rousseff announced cuts in taxes on food staples to curb inflation, reviving speculation that the central bank will refrain from increasing borrowing costs.

Swap rates due in January 2014 decreased 10 basis points, or 0.10 percentage point, to 7.86 percent at 10:06 a.m. in Sao Paulo. They climbed 34 basis points last week in the biggest five-day increase since May. The real declined almost 0.1 percent to 1.9452 per dollar today.

“The government is taking action so that the inflation outlook doesn’t get much worse,” Gustavo Rangel, the chief economist for Latin America at ING Group, said in a telephone interview from London.

Eliminating the 9.25 percent PIS/Cofins taxes on staple foodstuffs will rein in prices and stimulate the economy as Brazilians are able to save and consume more, Rousseff said in a televised address March 8. The measure will reduce tax revenue by 7.3 billion reais annually.

Swap rates rose to a six-month high on March 8 after the government reported that its IPCA index of consumer prices climbed 6.31 percent in February from a year earlier, the highest annual rate in 14 months.

Policy makers dropped a pledge to keep borrowing costs unchanged for a “prolonged period” from their statement accompanying the decision last week to leave the target lending rate at a record low 7.25 percent.

Economists cut their 2014 economic growth forecasts in a survey published today. Gross domestic product will expand 3.50 percent next year, according to the median estimate of about 100 analysts surveyed by the central bank, down from the prior projection of 3.65 percent.

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net; Josue Leonel in Sao Paulo at jleonel@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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