Brazilian Swap Rates Fall as Inflation Slows; Currency Drops

Brazil’s swap rates dropped the most in a week after a report showed inflation slowed more than economists forecast, spurring speculation that the central bank will push back an increase in borrowing costs.

Swap rates due in January 2015 fell seven basis points, or 0.07 percentage point, to 8.52 percent, the biggest decline on a closing basis since March 14. Swap rates decreased six basis points this week. The real fell less than one percent to 2.0094 per dollar after earlier sliding 0.6 percent. It has lost 1.3 percent since March 15.

“The inflation number was lower than expected,” Newton Rosa, the chief economist at SulAmerica Investimentos in Sao Paulo, said in a phone interview. “This result will strengthen the arguments of those who say the central bank should push the rate hike from April to May.”

The real pared its drop after central bank president Alexandre Tombini said in Sao Paulo that policy makers were ready to intervene in currency markets to avoid excessive volatility.

Brazil’s real weakened to 2 per dollar yesterday on speculation government intervention to spur flagging growth is prompting investors to withdraw money from the country. That level was last crossed in January, when the central bank stepped in to strengthen the currency as inflation accelerated.

“The tendency is for the central bank to act if the real decouples further from peer currencies,” Luiz Eduardo Portella, treasurer at Modal Asset Management in Sao Paulo, said in a telephone interview. “Otherwise, inflation expectations would worsen.”

Currency Intervention

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. The real closed at a 10-month high of 1.9442 per dollar on March 8 before the central bank intervened on March 11 to weaken it.

Minutes of the central bank’s March 5-6 meeting indicated that an increase in the target lending rate from a record low 7.25 percent wasn’t imminent as policy makers said “a cautious management of monetary policy” was needed. The monetary policy committee will next meet April 16-17 and May 28-29.

Tombini said today in Sao Paulo that Brazil’s inflation is showing resistance and more measures may be necessary beyond changes in communication regarding monetary policy.

The IPCA-15 index of consumer prices rose 0.49 percent in the month through March 15 after a prior increase of 0.68 percent, the national statistics agency reported today. The median forecast of 33 economists surveyed by Bloomberg was for a 0.53 percent advance.

Economists in a central bank survey published this week decreased their 2013 inflation outlook to 5.73 percent from 5.82 percent. They forecast growth of 3.03 percent this year after the economy expanded 0.9 percent in 2012.

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