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Brazil Swap Rates Decrease for Seventh Month on Economy

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July 31 (Bloomberg) -- Brazil’s swap rates declined for a seventh month on speculation the central bank will keep reducing interest rates to spur economic growth even as inflation picks up.

Swap rates on contracts due in January 2014 fell four basis points, or 0.04 percentage point this month to 7.85 percent. The yields rose one basis point today.

“The government is increasing its spending, trying to do more public investment, but there is still not much to show,” Alessandro Del Drago, an economist at Kinea Investimentos in Sao Paulo, said in a telephone interview.

The real depreciated for a second day on speculation the central bank will end a policy of swap auctions that supported the currency. It lost 2.3 percent this month.

Latin America’s biggest economy will expand 1.9 percent this year, compared with 2.7 percent in 2011, according to the median estimate of about 100 analysts in a central bank survey published yesterday. They cut their forecast for 2013 growth to 4.05 percent from 4.10 percent in the previous week.

Brazil plans another round of measures to spur growth including lower electricity costs, an investment policy for roads, ports and airports, and more tax cuts, President Dilma Rousseff told reporters in London on July 27.

Interest-Rate Cuts

The central bank has cut the target lending rate by 4.5 percentage points since August to a record low 8 percent to boost growth, which has faltered in the face of the European debt crisis and China’s slowdown. The government has reduced taxes on consumer goods including automobiles to support demand.

Prices as measured by the IGP-M index rose 1.34 percent in July, the Getulio Vargas Foundation reported yesterday. That was more than estimated by all except one of 36 economists surveyed by Bloomberg. Brazil’s broadest inflation gauge has a 60 percent weighting for wholesale prices, 30 percent for consumer prices and 10 percent for construction costs.

The real depreciated 0.8 percent to 2.0569 per U.S. dollar, extending the worst monthly performance among major Latin American counterparts tracked by Bloomberg.

“We continue to see very little reason for the real to appreciate in the near term,” Shelly Shetty, a senior director at Fitch Ratings, said on a conference call today, citing sluggish economic growth and a falling benchmark rate.

The central bank doesn’t plan to roll over $4.5 billion in currency swaps that mature at the beginning of August, a government official said last week.

Eased Stress

The level of stress in financial markets has eased in recent days, allowing the government to settle swap positions, said the official, who asked not to be identified because the matter hasn’t been made public.

“The market is pricing in for a second day the possibility that the bank isn’t going to roll over swaps,” Italo Abucater, the head of currency trading at ICAP Brasil CTVM in Sao Paulo, said in a phone interview.

The central bank auctioned $16.8 billion in swaps on 11 days from May 18 through June 29 to support the currency, according to data compiled by Bloomberg. The sales were a reversal of the bank’s dollar purchases, which increased to $7.2 billion in April, the most in 13 months, to weaken the real and support the country’s exporters. The bank abandoned those purchases in May.

The government had a 1.3 billion reais ($632 million) budget surplus in June, the Treasury said in a report released in Brasilia today. The median forecast of 12 economists surveyed by Bloomberg was for a surplus of 4 billion reais.

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