Brazilian Swap Rates Fall as Inflation Slows; Currency Declines

Brazil’s shorter-term swap rates dropped after a report showing slower annual inflation spurred speculation that the central bank will reduce the pace of increases in borrowing costs.

Swap rates due in January 2015 declined three basis points, or 0.03 percentage point, to 9.68 percent at 9:58 a.m. in Sao Paulo. The real depreciated 0.3 percent to 2.305 per dollar.

Annual inflation as measured by the IPCA consumer price index decelerated to 6.27 percent in July from 6.7 percent in June, the national statistics agency reported today. The central bank’s preferred range is 2.5 percent to 6.5 percent.

“The level of economic activity is weak and inflation is more or less behaving,” Paulo Gala, a strategist at Fator Corretora in Sao Paulo, said in a telephone interview.

Inflation hovering at the top of the central bank’s target range has eroded purchasing power in Latin America’s biggest economy and caused consumption to slow. To stem price increases, policy makers have embarked on the biggest cycle of interest-rate increases in the Group of 20 nations. A weakening currency, which increases import prices, led Finance Minister Guido Mantega to cut tariffs this month on more than 100 imported products, including steel.

Brazil’s central bank raised the target lending rate by a half-percentage point on July 10 to 8.50 percent, the third consecutive increase this year from a record low 7.25 percent.

The economy expanded 0.9 percent last year, its worst performance since 2009. Analysts surveyed by the central bank forecast gross domestic product will grow 2.24 percent in 2013 and inflation will end the year at 5.75 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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