Brazil Swap Rates Fall on Central Bank Outlook; Real Declines

Brazil’s swap rates dropped as central bank minutes indicating an increase in borrowing costs isn’t imminent overshadowed the fastest monthly economic growth in almost five years.

Swap rates due in January 2015 fell five basis points, or 0.05 percentage point, to 8.57 percent at 12:06 p.m. in Sao Paulo, erasing an earlier increase and extending the weekly decline to nine basis points. The real dropped 0.3 percent to 1.9768 per dollar and has fallen 1.7 percent since March 8, the biggest five-day loss since November.

“At first, the swap rates reacted to the economic activity indicator, but now the message from the central bank minutes is prevailing,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil in Sao Paulo. “The swap rates curve previously priced in a big rate hike in April, and the central ban made clear that it won’t raise rates now.”

The central bank said in minutes of last week’s meeting, published yesterday, that a “cautious management of monetary policy” is needed. Policy makers held the target lending rate at a record low 7.25 percent on March 6 and eliminated a pledge made in October to leave borrowing costs unchanged for a “prolonged” period.

Brazil’s seasonally adjusted economic activity index, a proxy for gross domestic product, climbed 1.29 percent in January after falling 0.45 percent in the prior month, the central bank reported today. The increase was the biggest since June 2008 and exceeded the 0.8 percent median forecast of analysts surveyed by Bloomberg.

To contact the reporter on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net

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

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