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Brazil Swap Rates Drop on Central Bank GDP Outlook; Real Slips

Brazil’s swap rates fell after the central bank reduced its economic growth forecast, spurring speculation that policy makers will limit increases in borrowing costs to avoid undermining the recovery.

Swap rates due in January 2015 dropped 13 basis points, or 0.13 percentage point, to 9.77 percent in Sao Paulo, paring their quarterly increase to 128 basis points. The real slipped 0.6 percent to 2.1989 per dollar, extending its drop in the past month to 5.6 percent, the biggest among major currencies tracked by Bloomberg.

“It doesn’t seem like the central bank is open to accelerating the borrowing-cost increases or having a bigger tightening cycle,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a telephone interview.

The central bank cut its 2013 economic growth forecast to 2.7 percent from 3.1 percent in a report today. Policy makers cited “volatility as a risk factor and the tendency of the dollar to appreciate.” They projected 6 percent annual inflation, assuming the target lending rate remains unchanged, compared with a March estimate of 5.7 percent, and 5.4 percent next year, up from 5.3 percent.

While the inflation forecasts for this year rose, they stayed below the 6.5 percent upper level of the target range, Carlos Thadeu de Freitas Gomes Filho, a senior economist at Franklin Templeton Investments, said in a telephone interview.

‘Positive Side’

“Most importantly, projections for inflation show that if the central bank doesn’t do anything, inflation will be 6 percent this year,” he said. “There are two possible readings. The negative one is inflation is rigid and we need an enormous rate increase. The positive one is inflation is on the rise this year and, theoretically, would ease next year. The market chose to look at the positive side.”

Consumer prices as measured by the IPCA-15 index rose 0.38 percent in the month through mid-June, the national statistics agency reported June 21. The median forecast of economists surveyed by Bloomberg was for an increase of 0.36 percent.

“The worsening of family and business sentiment is partially fueled by price increases in segments with high visibility, such as food, fuel and public tariffs,” the central bank said. “In the short term, annual inflation still has a tendency to rise and the balance of risks in the prospective outlook is unfavorable.”

The real rose yesterday after the central bank said it will eliminate reserve requirements on short dollar positions held by local banks to support the currency.

The Treasury sold all of the 2 million floating-rate government bonds maturing in 2018 that were offered today for 11.3 billion reais after canceling a planned auction of zero-coupon bonds.

The real has fallen 8.1 percent this quarter, poised for its biggest loss since the second quarter of 2012, as stagnant economic growth, violent street protests and speculation the Federal Reserve will curtail its stimulus program trigger a flight from emerging-market assets.

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