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Brazil Swap Rates Drop After Rousseff Comment

Dec. 12 (Bloomberg) -- Brazil’s swap rates fell for the first time in four days after comments from President Dilma Rousseff encouraged speculation that policy makers will keep borrowing costs at record lows through the first half of 2013.

“It’s like she’s saying we will try to keep that level as long as possible,” Italo Lombardi, an economist at Standard Chartered Bank, said in a phone interview from New York.

Interest rates are on track to converge with international levels, Rousseff said in a meeting with business leaders in Paris. The real rose after the Federal Reserve expanded asset purchases to support the world’s largest economy, spurring demand for emerging-market assets.

Swap rates on the contract due in January 2016 decreased nine basis points, or 0.09 percentage point, to 8.13 percent. The real appreciated 0.3 percent to 2.0721 per dollar, erasing an earlier decline.

Brazil’s policy makers left the target lending rate unchanged at a record low 7.25 percent last month, following 10 straight reductions. Traders use interest-rate swaps to bet on the direction of borrowing costs

Swap rates tumbled last week as Itau Unibanco Holding SA forecast policy makers will resume cutting borrowing costs next year after a report showed the economy expanded at half the pace economists forecast.

GDP Growth

Gross domestic product in the largest emerging economy after China grew 0.9 percent in the third quarter from a year earlier, the statistics agency reported Nov. 30. The median forecast of economists surveyed by Bloomberg was for a 1.9 percent expansion.

Finance Minister Guido Mantega told reporters in Paris that Brazil needs to reduce the cost of natural gas. The comments drove speculation that the effort to contain inflation will reduce the need to raise interest rates, said Luiz Eduardo Portella, Brazilian market treasurer at Modal Asset Management.

“The market is also reacting to Mantega’s comments about the efforts to bring down gas prices,” Portella said in a telephone interview from Rio de Janeiro.

Brazil announced on Sept. 11 electricity rate cuts for individuals and businesses by as much as 28 percent, sending stocks of the nation’s biggest utilities plummeting.

Rousseff will make the same effort to reduce natural gas prices as she did for electricity rates, Trade Minister Fernando Pimentel said at an event in Paris.

Fed Decision

The real advanced along with most emerging-market currencies after the Fed said it will adopt more stimulus measures. The central bank will purchase $45 billion in monthly Treasury securities starting in January, the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington.

A weaker Brazilian currency won’t help boost competitiveness unless inflation is kept in check, central bank President Alexandre Tombini said at a Senate hearing in Brasilia yesterday.

The comments indicate policy makers may not be comfortable with further declines in the real if they begin to stoke inflation, said Joao Paulo de Gracia Correa, the head of foreign-exchange trading at Correparti Corretora, said by phone from Curitiba, Brazil.

“The central bank and the finance ministry are more concerned about inflation,” he said.

Brazil’s annual rate of consumer price increases as measured by the IPCA gauge has exceeded the 4.5 percent midpoint of the central bank’s target range for 27 consecutive months. Yearly inflation unexpectedly accelerated to 5.53 percent in November from 5.45 percent the month before, the statistics agency reported Dec. 7.

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net; Patricia Lara in Sao Paulo at plara6@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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