Brazil’s Swap Rates Advance as Central Bank Eases Credit Rules

Brazil’s swap rates advanced today as the central bank eased reserve-requirement rules in a bid to boost credit amid a faltering economy.

Swap rates on contracts maturing in January 2017, a gauge of expectations for interest rates moves, advanced six basis points, or 0.06 percentage point, to 11.42 percent. The real declined 0.7 percent to 2.2620 per dollar after Fed officials said job gains in the U.S. may result in faster interest rate increase.

Policy makers reduced capital requirements for banks by 15 billion reais, a move that could generate as much as 140 billion reais in loans, according to central bank official Caio Ferreira. They also created incentives for banks to channel as much as 10 billion reais from reserve requirements into lending. It’s the second time this quarter that the central bank eased rules to boost economic activity.

“The measure announced today could inject a good amount of money into the economy,” Solange Srour, chief economist at ARX Investimentos in Rio de Janeiro, said in a telephone interview.

Central bank President Alexandre Tombini said earlier this month that controlling inflation with higher borrowing costs isn’t at odds with measures to free up credit.

Yesterday UBS AG cut its 2014 growth estimate for Brazil to 0.6 percent from 1.2 percent. The new forecast assumes that gross domestic product has contracted for two straight quarters, implying the economy will fall into a technical recession, according to the report.

Housing Market

Brazilian banks will sell covered bonds as part of a government push to stimulate the housing market and free up credit, Finance Minister Guido Mantega said today. Real-estate stocks rallied.

The loans probably will attract foreign investors and will be exempt from income taxes when they have average maturity exceeding two years, Mantega told reporters in Brasilia. Brazil plans to publish rules allowing covered bonds before the weekend, Deputy Finance Minister Paulo Caffarelli said at the same event.

Consumer Prices

Brazil’s consumer prices in the month through mid-August rose at the slowest pace in 13 months as the cost of food and beverages fell, the national statistics agency said today in Rio de Janeiro. The IPCA-15 index decelerated to 0.14 percent from 0.17 percent the month before, the national statistics agency said. That compares with the 0.15 percent median estimate of economists surveyed by Bloomberg.

The central bank held the target lending rate last month at 11 percent for a second straight meeting after nine consecutive increases. Policy makers are counting on the highest borrowing costs among rate-setting nations in the Group of 20 to slow consumer price increases as President Dilma Rousseff campaigns for re-election Oct. 5.

Brazil’s real extended decline with other emerging market currencies after Fed officials came closer to agreement on an exit strategy from aggressive stimulus that benefit assets from emerging markets, raising the possibility that it might occur sooner than anticipated, according to minutes of their July meeting released today.

Currency Swaps

The real has advanced 4.4 percent this year partly on speculation Rousseff would lose her re-election bid and a new administration would bolster economic growth.

To support the currency and limit import prices, the central bank sold swaps worth $197.4 million under an intervention program due to expire in December and rolled over $493.1 million worth of contracts.

Brazil posted a net inflow of foreign currency of $500 million in the month through Aug. 15, extending this year’s balance to $2.86 billion according to data released by the central bank today.

To contact the reporter on this story: Filipe Pacheco in Sao Paulo at fpacheco4@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Rita Nazareth

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