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Brazil Swap Rates Drop as GDP Trails Forecasts; Real Declines

Brazil’s swap rates fell, extending their weekly drop to the biggest this year, as fourth-quarter economic growth trailed forecasts, damping speculation that the central bank will raise borrowing costs to curb inflation.

Swap rates on the contracts due in April 2014 declined seven basis points, or 0.07 percentage point, to 7.73 percent. They have dropped 26 basis points this week, the most since the five days ended Dec. 7. The real fell 0.1 percent to 1.9797 per U.S. dollar and has weakened 0.4 percent since Feb. 22.

“The weaker GDP growth reinforces the idea that the economy is having a weak recovery and removes the urgency of rate hikes,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento SA in Sao Paulo, said in a telephone interview.

Brazil’s gross domestic product grew 1.4 percent in the fourth quarter from a year earlier after a 0.9 percent increase in the prior three months, the national statistics agency reported today. The median forecast of analysts surveyed by Bloomberg was for growth of 1.6 percent. Latin America’s biggest economy expanded 0.9 percent in 2012, less than all other major emerging markets.

The economic expansion slowed for a second straight year in 2012 even as President Dilma Rousseff’s administration extended tax cuts, pressured banks to lower interest rates, courted private investment and weakened the currency.

Mantega’s Outlook

The economy started recovering at the end of 2012 and will accelerate in 2013, Finance Minister Guido Mantega told reporters in Brasilia.

Brazil has succeeded in reducing swings in the real after letting the currency fall 19 percent over two years to protect local manufacturers, Mantega said in an interview on Feb. 26 in New York. Now that the real is hovering at about 2 per dollar, Brazil is abandoning policies to depress the currency, he said.

The central bank will decide next week whether to hold the target lending rate at a record low 7.25 percent for a third straight meeting to support the economy even as inflation has exceeded the 4.5 percent midpoint of its preferred range for more than two years.

The HSBC Purchasing Managers’ Index for Brazil’s manufacturing sector fell to 52.5 in February from 53.2 in the prior month, Markit Economics said on its website. A reading above 50 indicates an expansion.

While policy makers led by central bank President Alexandre Tombini probably won’t increase borrowing costs at the March 5-6 meeting, there is a “real risk” that they may pull back from their language to keep rates stable for a prolonged period, according to Eduardo Suarez, a Latin America currency strategist at Bank of Nova Scotia.

Rousseff and Tombini “appear to be involved in a campaign to reverse the damage to the country’s policy-making credibility and seem focused on affirming the message that the central banks’ inflation-fighting mandate is unaltered,” Suarez wrote in an e-mailed report.

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