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Brazil Swap Rates Drop on Economic Growth Concern; Real Declines

Brazil swap rates fell as analysts in a central bank survey cut their economic growth forecasts for a fifth straight week, supporting speculation borrowing costs will stay at record lows through the first half of 2013.

Swap rates on contracts due in January 2014 dropped one basis point, or 0.01 percentage point, to 7.08 percent today in Sao Paulo. The real depreciated 0.7 percent to 2.0996 per U.S. dollar.

About 100 economists in a weekly central bank survey published today lowered their median estimate for 2013 growth to 3.4 percent from 3.5 percent the week before. They raised their year-end inflation forecast for next year to 5.42 percent from 5.40 percent.

“Even though there are inflation concerns, the weak GDP numbers prevailed,” Roberto Padovani, the chief economist at Votorantim Ctvm, said in a phone interview from Sao Paulo.

Brazil’s policy makers left the target lending rate 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.

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.

The IGP-10 inflation index rose 0.63 percent in the month through Dec. 10, the Getulio Vargas Foundation reported today. The median forecast of 25 analysts in a survey by Bloomberg was for a 0.5 percent increase. The gauge is composed of 60 percent wholesale prices, 30 percent consumer prices and 10 percent construction costs.

Inflation Target

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. Annual inflation unexpectedly accelerated to 5.53 percent in November from 5.45 percent the month before, the statistics agency reported Dec. 7.

The real has dropped 11 percent this year, the worst performance among the dollar’s 16 most-traded counterparts tracked by Bloomberg.

Policy makers have swung in 2012 between selling currency swaps aimed at preventing the real from depreciating too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening.

The central bank sold $2.1 billion in currency swaps Dec. 3 and $1.6 billion on Nov. 23 to stem the real’s declines. From August through October, the bank sold reverse currency swaps to keep the real weaker than 2 per dollar.

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