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Brazilian Swap Rates Decline After Inflation Report; Real Slips

Brazil’s longer-term swap rates dropped to a two-week low after an inflation report added to speculation that central bankers will signal tomorrow that they will slow the pace of increases in borrowing costs.

Swap rates due in January 2016 fell four basis points, or 0.04 percentage point, to 10.85 percent, the lowest level on a closing basis since Sept. 24. The real fell 0.3 percent to 2.211 per dollar.

While investors anticipate that the central bank will raise the benchmark rate by a half-percentage point for the fourth straight time tomorrow, they’re betting that the pace of increases will slow to a quarter-point in November, swaps trading shows. The real’s 10 percent rebound since Aug. 22, a rally sparked by the country’s $60 billion intervention plan, is helping slow an inflation surge that central bankers have been trying to curb since they started raising rates in April.

The gauge “came in lower than expected,” reflecting the impact of a stronger real, Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil in Sao Paulo, said in a telephone interview.

Wholesale, construction and consumer prices rose 1.36 percent in September from a month earlier after previously climbing 0.46 percent, the Getulio Vargas Foundation reported today. The median forecast of 30 economists surveyed by Bloomberg was for a 1.49 percent increase.

Shorter-term swap rates rose after Petroleo Brasileiro SA’s Chief Executive Officer Maria das Gracas Foster said at an event in Sao Paulo that the state-controlled oil company may increase gasoline prices this year.

Rate Increases

Since April, the central bank has increased the benchmark lending rate by 1.75 percentage points to 9 percent, the most among 49 major economies tracked by Bloomberg.

The pace of consumer price increases 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. Twice this year the inflation rate broke the 6.5 percent upper limit of the central bank’s target range.

The International Monetary Fund said in a report today that inflation persists in Latin America’s largest economy and threatens to damp consumption, making interest-rate increases “appropriate.” The fund kept its economic growth forecast for Brazil this year unchanged at 2.5 percent while reducing its 2014 estimate to 2.5 percent from 3.2 percent.

Moody’s Investors Service cited sluggish growth, rising gross debt and increased lending by state banks in cutting Brazil’s outlook last week to stable on the nation’s Baa2 credit rating, which is two levels above junk.

Brazil’s development bank said today in a statement that it is studying “new initiatives” to reduce its need for Treasury funds and that it could raise money in the market or create new financial products. The bank said it has no plan for “massive” sales of its assets after Valor Economico reported it plans to sell assets to help avoid a rating cut.

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