Brazil Swap Rates Fall on China Manufacturing; Real Strengthens

Brazilian swap rates fell as a report that showed manufacturing improved less than forecast in China, the country’s top trade partner, fueled speculation that policy makers will limit borrowing-cost increases.

Swap rates due January 2015 fell six basis points, or 0.06 percentage point, to 8.23 percent at 10:38 a.m. in Sao Paulo, the lowest on a closing basis since Feb. 14. The real rose 0.3 percent to 2.0137 per dollar.

A preliminary April reading of 50.5 for a purchasing manager’s index published by HSBC Holdings Plc (HSBA) and Markit Economics compared with 51.6 in March. The median estimate of 11 economists surveyed by Bloomberg was 51.5. A figure above 50 means the number of manufacturers who said conditions improved was greater than those who said they deteriorated.

“Policy makers made it clear that the foreign scenario is a main source of uncertainty for Brazil and the world economy’s data has disappointed,” said Marcelo Fonseca, an economist at M Safra & Co DTVM, in a phone interview from Sao Paulo. “It will be difficult for the central bank to not raise rates in May, but the bets tend to converge toward a hike of 25 basis points. The total tightening cycle could be just 100 or even 75 basis points.”

The central bank’s board last week voted 6 to 2 to raise the target lending rate by 25 basis points to 7.50 percent from a record low 7.25 percent. A survey by Bloomberg showed that 18 of 58 economists had forecast an increase of 50 basis points.

Policy makers said in their statement that “resilience of inflation” required a response tempered by the central bank’s recognition that “external uncertainties” also required “that monetary policy be managed with caution.”

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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