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Brazilian Swap Rates Decline on Inflation Outlook; Real Climbs

Oct. 7 (Bloomberg) -- Brazil’s swap rates fell as analysts surveyed by the central bank lowered their 2014 inflation outlook, adding to wagers policy makers will signal this week that the pace of increases in borrowing costs will slow.

Swap rates due in January 2017 declined four basis points, or 0.04 percentage point, to 11.24 percent, the lowest level on a closing basis since Sept. 25. The real appreciated 0.3 percent to 2.2052 per dollar.

Economists lowered their forecast for annual inflation at the end of 2014 to 5.95 percent from 5.97 percent and held their outlook for the target lending rate at 9.75 percent, according to the median of about 100 estimates in a central bank survey published today. Policy makers prepared for a two-day meeting beginning tomorrow after raising the target lending rate to 9 percent from a record low 7.25 percent in April.

“I have no reason to question the majority view that they will raise to 9.75 percent this year and probably not going to go further than that,” Siobhan Morden, the head of Latin America fixed income at Jefferies Group LLC, said in a telephone interview from New York.

Inflation was slower than 6 percent in the year through mid-September for the first time in nine months, the national statistics agency reported last month.

Policy makers will work to bring inflation as close to target as possible next year, central bank President Alexandre Tombini said in an interview in London last week. Annual inflation twice broke the 6.5 percent upper limit of the central bank’s target range this year.

The central bank will raise the target lending rate by a half-percentage point to 9.5 percent on Oct. 9, according to the median forecast of economists surveyed by Bloomberg.

Real’s Gain

The real has rallied 10 percent since Aug. 22, when the central bank announced a $60 billion intervention program to bolster the currency and reduce the price of imports. The advance after touching a 4 1/2-year low is the biggest among all of the world’s currencies.

The chances of an opposition victory over President Dilma Rousseff in next year’s presidential election increased after former Senator Marina Silva announced an alliance with Pernambuco Governor Eduardo Campos’s Socialist Party, Citigroup Inc.’s Stephen H. Graham and Fernando Siqueira wrote in a research note to clients published today.

“There will be less autonomy for the central bank to pursue price stability if it becomes a tighter race because the bank would have to promote a pro-growth bias,” Morden said.

Swap rates also declined today as the U.S. budget impasse and partial government shutdown diminished the prospects for the global economic recovery.

With the U.S. set to exhaust measures to avoid breaching its debt ceiling Oct. 17, House of Representatives Speaker John Boehner said yesterday on the ABC television network’s “This Week” program that lawmakers won’t raise the limit without packaging it with other provisions.

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net; Josue Leonel in Sao Paulo at jleonel@bloomberg.net

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

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