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Brazil Swap Rates Rise on Borrowing-Cost Forecast; Real Gains

Brazil’s swap rates increased after economists raised their forecasts for the amount policy makers will boost borrowing costs to tame surging inflation.

Swap rates on the contract due in January 2015 rose three basis points, or 0.03 percentage point, to 9.90 percent. The real appreciated 0.1 percent to 2.2290 per dollar after losing 9.4 percent in the second quarter, the worst performance among major emerging-market currencies.

Policy makers will raise the benchmark Selic rate to 9.25 percent this year and hold it at that level through 2014, up from the previous week’s forecast of 9 percent, according to a June 28 central bank survey of about 100 economists and analysts published today. Central bankers have increased the rate twice this year, lifting it to 8 percent from a record-low 7.25 percent.

“The Selic forecast is higher for this year and for next year,” Marco Antonio Caruso, an economist at Banco Pine SA, said by phone from Sao Paulo. “This helps marginally to push the curve up more.”

Brazilian consumer prices rose 6.67 percent in the 12 months through mid-June, above the upper limit of the central bank’s target range. Economists increased their 2013 inflation forecast to 5.87 percent from 5.86 percent a week ago, according to the central bank survey.

Swap rates also rose after Brazil changed rules to facilitate the state development bank’s payment of dividends to the Treasury, undermining investor confidence that the government will use spending cuts to help cool inflation, Caruso said.

‘Political Noise’

“These accounting moves are bad and the signals they send are bad,” he said. “The political noise obligates the market to charge a higher premium.”

Longer-term swap rates fell as economists cut their 2014 growth forecast to 3 percent, from 3.1 percent the week before.

Economic and social discontent in Latin America’s largest economy has prompted the biggest street protests in decades, as more than a million demonstrators have taken to the streets in the past month to demonstrate against inflation, government corruption and the quality of public services.

President Dilma Rousseff’s approval rating fell to 30 percent, according to a Datafolha poll published over the weekend, from 57 percent in the first week of June and a high of 65 percent in March.

Brazil’s budget deficit almost doubled to 14.5 billion reais in May from 7.7 billion reais in the prior month, the central bank reported June 28. Rousseff pledged 50 billion reais to improve urban public transportation when she met with protest leaders June 24.

‘Few Instruments’

The real gained along with most of the 16 major dollar counterparts as commodities rallied and global stocks advanced. It has lost 8 percent this year. The central bank sold foreign-exchange swap contracts worth $3.98 billion on June 28 to stem the currency’s two-month rout.

“There’s some volatility today, but the trend is for the real to depreciate,” Sidnei Nehme, currency director at NGO Corretora, said by phone from Sao Paulo. “The government has few instruments, and fragile ones, against the rise of the dollar.”

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