Brazil swap rates dropped to a record low after an index that is weighted mostly in producer prices fell more than economists forecast, reducing speculation that the central bank will raise borrowing costs.
Rates on contracts due in January 2014 fell one basis point, or 0.01 percentage point, to 7.32 percent at 3:23 p.m. in Sao Paulo, matching a record low reached on Nov 5. The real depreciated 0.1 percent to 2.0343 per dollar.
The Getulio Vargas Foundation’s IGP-DI price index decreased twice as fast as analysts forecast in October from a month earlier, led by a 0.68 percent drop in producer prices. The index is composed of 60 percent wholesale prices, 30 percent consumer prices and 10 percent construction costs.
“What is deepening the fall in swap rates today is the IGP-DI results, which showed deflation in agricultural and industrial prices,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil, said in a phone interview.
The IGP-DI decreased 0.31 percent in October from a month earlier, compared with the median forecast of a 0.15 percent slide among 31 analysts surveyed by Bloomberg.
Keeping borrowing costs at record lows for a “prolonged time” is still the best strategy to ensure inflation will slow to target in the third quarter of 2013, central bank President Alexandre Tombini said in an interview at his office in Brasilia today.
The central bank has cut its benchmark lending rate by 525 basis points since August 2011, the most among the Group of 20 nations, to a record 7.25 percent. Policy makers target inflation of 4.5 percent plus or minus two percentage points.
Consumer prices as measured by the IPCA index increased 0.59 percent in October from a month earlier, the national statistics agency said today in Rio de Janeiro, in line with the 0.58 percent median forecast of analysts surveyed by Bloomberg. Annual inflation accelerated to 5.45 percent, from 5.28 percent the month before.
The central bank will continue to pursue its 4.5 percent inflation target and focus on price stability, Carlos Hamilton, the bank’s head of economic policy, said Oct. 31. The pace of price increases is unlikely to converge to the target until the third quarter of 2013 because of a spike in food prices, he said in September.
IGP prices will accelerate again in the next few readings as agricultural costs increase and food prices show smaller declines, Octavio de Barros, an economist at Banco Bradesco SA, said in an e-mailed note to clients today.
President Dilma Rousseff ’s administration has extended tax cuts for consumer and industrial goods, cut bank reserve requirements to boost lending and pressured banks to reduce borrowing costs to spur demand.
Recent data show the stimulus hasn’t gained traction in all sectors of the economy. Industrial output in September fell 1 percent from August, the first decline in four months. Consumer default rates in September remained at the highest level since November 2009.
Economists cut their 2012 inflation forecasts for the first time since July, to 5.44 percent, according to the median estimate in a central bank survey of about 100 analysts published Nov. 5. They maintained forecasts of 1.54 percent gross domestic product growth this year and 4 percent expansion in 2013.
Brazilian swaps traders have been overestimating how soon the central bank will reverse course and raise borrowing costs, Paulo Leme, the chief of Goldman Sachs Group Inc.’s offices in the country, said Oct. 26. Policy makers are likely to keep the benchmark rate unchanged through the end of 2013, Leme said in a speech at a Brazilian pension fund conference in Sao Paulo.
The central bank will raise the benchmark Selic rate by 25 basis points as soon as May, trading in swap rates show.