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Brazil Swap Rates Fall as Economy Shrinks in May; Real Declines

July 12 (Bloomberg) -- Brazil’s longer-term swap rates dropped after a report showed Latin America’s biggest economy contracted in May, spurring speculation that the central bank will limit increases in borrowing costs to support growth.

Swap rates on contracts maturing in January 2017 declined three basis points, or 0.03 percentage point, to 10.83 percent, extending their decline this week to 21 basis points. The real depreciated 0.5 percent to 2.2672 per dollar and has fallen 0.9 percent since July 5.

Brazil’s economic activity index dropped 1.4 percent in May, the central bank reported today. The median forecast of 22 economists surveyed by Bloomberg was for a 1.15 percent decrease in the proxy for gross domestic product.

“The growth indicators have been predominantly weaker,” Rafael Bacciotti, an economist at Tendencias Consultoria, said in a telephone interview from Sao Paulo.

Shorter-term swap rates climbed, with those on the contract maturing in January increasing one basis point to 8.80 percent, paring their drop this week to two basis points.

The central bank raised the target lending rate by a half-percentage point to 8.50 percent on July 10 in the third increase this year from a record low 7.25 percent. Policy makers raised the benchmark by a quarter-percentage point in April and 50 basis points in May.

Inflation in Brazil accelerated to a 20-month high of 6.70 percent in June, exceeding the 6.50 percent upper level of the central bank’s target range.

Street Protests

Brazilian protesters took to the streets in June to oppose a bus fare increase in Sao Paulo. Discontent later spread to other metropolitan centers including Brasilia, Porto Alegre and Rio de Janeiro, as demonstrators expanded their grievances to include corruption and public services.

The central bank yesterday eliminated capital requirements that increased the costs for banks to bring into the country foreign-currency loans raised by their subsidiaries abroad. The move added to government efforts to slow a decline in the currency prompted by concern the U.S. may unwind stimulus.

The real rose yesterday as Federal Reserve Chairman Ben S. Bernanke said July 10 that “highly accommodative monetary policy for the foreseeable future is what’s needed,” buoying demand for emerging-market assets. Bernanke told the U.S. Congress in May that the Fed may taper bond purchases if the economy continues to improve in line with the central bank’s forecasts.

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net; Patricia Lara in Sao Paulo at plara6@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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