Brazil’s Swap Rates Fall as Consumer Prices Drop; Real Advances

Brazil’s swap rates declined to a six-week low as reports showed consumer prices dropped and consumer confidence waned, spurring speculation that the central bank’s increases in borrowing costs will be limited.

Swap rates on the contract due in January 2015 fell seven basis points, or 0.07 percentage point, to 9.28 percent, the closing level since June 7. The real appreciated 0.9 percent to 2.2139 per dollar after gaining 0.6 percent yesterday, when the central bank intervened to support the currency by selling $995 million in foreign-exchange swap contracts.

Consumer prices in Brazil’s seven biggest cities declined 0.11 percent in the month through July 22, the Getulio Vargas Foundation reported today. The median forecast of analysts surveyed by Bloomberg was for a 0.02 percent drop. Food fell 0.42 percent while transportation slid 0.80 percent.

“Price indexes are being favored by a drop in food and transportation prices, seasonal factors that are guaranteeing this retreat,” Mauricio Nakahodo, a researcher at Bank of Tokyo Mitsubishi, said by phone from Sao Paulo. “These indicators assure there will be a drop in swap rates.”

The Vargas foundation also reported today that its index of consumer confidence declined for a third consecutive month in July, falling to 108.3 from 112.9.

The real rallied the most among major Latin American currencies tracked by Bloomberg on export prospects. China, Brazil’s biggest trading partner, is pledging economic growth of at least 7 percent this year and Federal Reserve Chairman Ben S. Bernanke quelled concern in congressional testimony last week that a reduction of U.S. monetary stimulus was imminent.

‘More Positive’

“The news out of China is more positive,” Deives Ribeiro, the head of currency trading at Fair Corretora de Cambio e Valores, said by phone from Sao Paulo. “The government there wants to sustain growth. And in the U.S., there is still economic stimulus.”

The Fed will trim in September its monthly bond buying to $65 billion from the current pace of $85 billion, according to half of economists in a July 18-22 survey by Bloomberg, up from 44 percent in last month’s poll.

Brazil’s policy makers raised the target lending rate by a half-percentage point on July 10 to 8.50 percent, the third increase this year. The central bank said in minutes of the meeting that it is appropriate to maintain the pace of increases in borrowing costs to curb inflation.

The government is cutting spending for the second time in two months to help meet its fiscal target as it forecasts slower growth this year in Latin America’s biggest economy.

Belt Tightening

Finance Minister Guido Mantega said yesterday that the government is reducing expenditures by 10 billion reais and lowering this year’s economic growth forecast to 3 percent from 3.5 percent. The government will meet its primary budget surplus target, which excludes interest payments, of 2.3 percent of gross domestic product this year without reducing investments, according to Mantega.

First-quarter GDP growth unexpectedly slowed to 0.55 percent from the previous three-month period, trailing analysts’ forecasts for a fifth straight quarter. GDP climbed 0.9 percent last year, the worst performance since the 2009 recession.

To contact the reporters on this story: Gabrielle Coppola in Sao Paulo at gcoppola@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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