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Brazil Swap Rates Fall Before Central Bank Decision; Real Drops

Brazil’s swap rates dropped as speculation eased that policy makers will sustain the pace of increases in borrowing costs today to curb inflation.

Swap rates on contracts maturing in January 2015 declined four basis points, or 0.04 percentage point, to 10.74 percent at the close of trading in Sao Paulo after earlier climbing seven basis points. The real lost 0.4 percent to 2.3594 per U.S. dollar.

Most traders still are betting that policy makers will raise the target lending rate today by 50 basis points for a sixth straight meeting after abandoning speculation that the pace of increases would slow. The government reported on Jan. 10 that consumer prices rose 5.91 percent in 2013 even as central bank President Alexandre Tombini said in October that inflation would be less than the prior year’s 5.84 percent.

“The reaction to Friday’s inflation data was very strong and probably a bit overdone,” Eduardo Suarez, Latin America strategist at Bank of Nova Scotia, said in a telephone interview from Toronto.

The central bank has lifted borrowing costs by 2.75 percentage points since April to 10 percent, the biggest increase among 49 central banks tracked by Bloomberg.

Brazil will raise the target lending rate to 10.50 percent by year-end and 11.50 percent by the close of 2015, according to the median of about 100 estimates in a central bank survey published Jan. 13.

Brazil Outflow

The central bank reported a net foreign-exchange outflow of $1.22 billion this month through Jan. 10, following an outflow of $12.26 billion in 2013, the biggest since 2002, when the currency tumbled to almost 4 per dollar.

The real dropped 7.7 percent in the past three months, the worst performance among 16 major currencies tracked by Bloomberg after South Africa’s rand, on concern fiscal deterioration will lead to a lower credit rating.

Latin America’s largest economy will expand 2.4 percent this year and 2.7 percent in 2015, the World Bank said yesterday. That’s more than predicted by economists surveyed by Brazil’s central bank, who say gross domestic product will grow 1.99 percent in 2014 and 2.48 percent next year.

To support the currency and limit import price increases, Brazil sold $198 million of foreign-exchange swaps today under a program announced Dec. 18 to offer $200 million each trading day until at least June 30.

The central bank said Jan. 10 it will hold auctions beginning tomorrow to roll over $11 billion of currency swaps maturing Feb. 3. It extended maturities in offerings last month on all of the $9.9 billion of contracts due Jan. 2.

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