Brazil Swap Rates Fall Before Central Bank; Real Little Changed

Brazil’s swap rates dropped for a fourth straight day on speculation that policy makers convening for a two-day meeting will limit increases in borrowing costs to a quarter-percentage point.

Swap rates on contracts due in January 2019 sank 12 basis points, or 0.12 percentage point, to 12.44 percent today in Sao Paulo, the lowest since Nov. 22. The real was little changed at 2.3412 per U.S. dollar.

Policy makers will raise the target lending rate by 25 basis points tomorrow to 10.75 percent, according to the median estimate of 61 economists surveyed by Bloomberg, after six straight increases of a half-percentage point. Brazil’s construction costs index rose 8 percent in February from a year earlier, the slowest pace since September, the Getulio Vargas Foundation reported.

“The local swap rates market should stay focused on tomorrow’s” rate decision, Octavio de Barros, the chief economist at Banco Bradesco SA (BBD), said in an e-mailed research note to clients. “Construction-sector growth continues to be moderate at the beginning of the year.”

The real has climbed 3.1 percent in February on eased concern that fiscal deterioration will lead to a lower credit rating. The rally is the biggest among 16 major dollar counterparts tracked by Bloomberg after the Norwegian krone and the South African rand.

Brazil will probably keep its stable outlook this year because the government won’t change policies before the October presidential election, Moody’s Investors Service analyst Mauro Leos said today at an event in New York.

Moody’s Outlook

Last year Moody’s changed the outlook on its Baa2 rating, the second-lowest level of investment grade, to stable from positive and Standard & Poor’s placed its comparable BBB on negative outlook, citing deteriorating fiscal policy.

Finance Minister Guido Mantega said Feb. 20 that Brazil is cutting 44 billion reais from this year’s budget, allowing the government to meet a primary surplus target, excluding interest payments, of 1.9 percent of gross domestic product.

“The government’s commitment to the fiscal goal reduces the risk of a rating downgrade,” Luciano Rostagno, strategist at Banco Mizuho do Brasil in Sao Paulo, said by phone.

Tax collection rose to 124 billion reais in January, up from 118 billion reais in the prior month, in line with the median forecast of economists surveyed by Bloomberg.

To support the real and limit import price increases, Brazil sold $197.4 million of foreign-exchange swaps today under a program announced in December. The central bank also held an auction to extend maturities on swaps due in March, rolling over $546.2 million.

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: Brendan Walsh at bwalsh8@bloomberg.net

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