Brazil Swap Rates Fall on Sign of Slowing Inflation; Real Drops

Brazil’s swap rates dropped as consumer prices in Sao Paulo rose less than economists forecast and Europe’s recession deepened, fueling speculation that the central bank will refrain from lifting borrowing costs.

Swap rates on the contract due in January 2015 decreased three basis points, or 0.03 percentage point, to 8.13 percent at 11:54 a.m. in Sao Paulo. The real was little changed at 1.9650 per dollar after earlier falling as much as 0.2 percent.

Consumer prices in Brazil’s biggest city rose 1.01 percent in the four weeks ended last week, Foundation Economics Research Institute reported today. The median forecast of 18 economists surveyed by Bloomberg was for a 1.07 percent increase. Europe’s economy contracted the most in almost four years.

“The FIPE inflation was a bit better than expected,” Darwin Dib, the chief economist at CM Capital Markets Asset Management, said by phone from Sao Paulo. “The data in Europe puts an end to the myth of global recovery, the global crisis hasn’t ended yet.”

Gross domestic product in the euro area fell 0.6 percent in the fourth quarter from the previous three months, the most since the first quarter of 2009, the European Union’s statistics office reported.

Policy makers have cut benchmark borrowing costs by 5.25 percentage points since August 2011, the most aggressive cuts among Group of 20 nations, to a record low 7.25 percent. The best way to curb consumer price increases is to keep the target rate at a record low for a “sufficiently prolonged period,” policy makers said in the minutes of their Jan. 15-16 meeting.

Swap Rates

Swap rates on the contract due in January 2015 have risen 17 basis points this month, after climbing 24 basis points in January, the biggest monthly jump since December 2011, on increased inflation concerns.

The real avoided today’s broader decline among emerging-market peers, sparked by global growth concerns, because investors are more focused on the possibility of government intervention, said Jose Carlos Amado, a currency trader at Renascenca DTVM in Sao Paulo.

“The market is still trying to understand what is the comfortable level for the central bank that would help it control inflation without compromising the efforts that were already made to depreciate it and incentivize exports,” Amado said in a telephone interview.

Policy makers swung in 2012 between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond 2 per dollar.

The real rallied to a level stronger than 2 per U.S. dollar on Jan. 28 for the first time since July after the central bank renewed $1.85 billion of currency swaps about to expire, refraining from buying dollars to settle the contracts. On Jan. 31, the government exempted foreigners from a tax on real-estate funds traded on the stock exchange, spurring speculation that inflows will help sustain the real.

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