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Brazil Swap Rates Fall on Central Bank Outlook; Real Depreciates

Brazil’s swap rates dropped as central bank minutes indicating an increase in borrowing costs isn’t imminent overshadowed the fastest monthly economic growth in almost five years.

Swap rates due in January 2015 fell four basis points, or 0.04 percentage point, to 8.58 percent, erasing an earlier increase and extending the weekly decline to eight basis points. The real dropped 0.6 percent to 1.9831 per dollar and has fallen 2 percent since March 8, the biggest weekly loss since November.

“At first, the swap rates reacted to the economic activity indicator, but now the message from the central bank minutes is prevailing,” said Luciano Rostagno, the chief strategist at Banco WestLB do Brasil in Sao Paulo. “The swap rates curve previously priced in a big rate hike in April, and the central bank made clear that it won’t raise rates now.”

The central bank said in minutes of last week’s meeting, published yesterday, that a “cautious management of monetary policy” is needed. Policy makers held the target lending rate at a record low 7.25 percent on March 6 and eliminated a pledge made in October to leave borrowing costs unchanged for a “prolonged” period.

Brazil’s seasonally adjusted economic activity index, a proxy for gross domestic product, climbed 1.29 percent in January after falling 0.45 percent in the prior month, the central bank reported today. The increase was the biggest since June 2008 and exceeded the 0.8 percent median forecast of analysts surveyed by Bloomberg.

Growth Outlook

Economists cut their 2014 growth forecasts in a survey published this week. Gross domestic product will expand 3.50 percent next year, according to the median estimate of about 100 analysts surveyed by the central bank, down from the prior projection of 3.65 percent.

The minutes published this week cite signals that growth is recovering and indicate policy makers may be less inclined to raise borrowing costs as inflation diminishes, according to Flavia Cattan-Naslausky, local markets strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut.

“As long as the potential is increasing, inflationary growth is lower and they can remain biased towards accommodative,” Cattan-Naslausky wrote in an e-mailed research report today.

The real closed at a 10-month high of 1.9442 on March 8 before the central bank sold $1 billion of reverse foreign-exchange swaps on March 11 to weaken it. The currency has rallied 3.5 percent this year, the second-best performance among 25 emerging-market currencies.

The central bank has swung between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by preventing excessive gains.

Brazil pushed the real down 9 percent in 2012 and 11 percent the prior year in response to what Finance Minister Guido Mantega said was developed countries’ attempts to debase their currencies while driving up those of emerging-market nations.

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