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Brazilian Swap Rates Decline as Economy Contracts; Real Advances

Brazil’s swap rates dropped after a report showed the nation’s economy contracted more than forecast in December, adding to speculation that the central bank will limit further increases in borrowing costs.

Swap rates on contracts maturing in January 2015 declined six basis points, or 0.06 percentage point, to 11.32 percent at the close in Sao Paulo and were down the same amount this week. The real appreciated 0.2 percent to 2.3889 per U.S. dollar and has lost 0.4 percent since Feb. 7.

The seasonally adjusted economic activity index, a proxy for gross domestic product, fell 1.35 percent in December from a month earlier, compared with a 1.2 percent reduction forecast by analysts surveyed by Bloomberg. Policy makers have raised the target lending rate by 3.25 percentage points to 10.5 percent since April to curb inflation.

“The central bank must be concerned about overdoing the rate hikes and analyzing how not to decelerate activity,” Vinicius Botelho, an economist at the Getulio Vargas Foundation, said in a phone interview from Rio de Janeiro.

Retail sales unexpectedly declined in December for the first time in 10 months, while industrial output dropped as capital goods production plunged. The Getulio Vargas Foundation’s gauge of consumer confidence fell last month to the lowest in 4 1/2 years.

The real has dropped 3.1 percent in the past three months on concern fiscal deterioration will lead to a lower credit rating and amid speculation that the tapering of Federal Reserve stimulus will erode demand for emerging-market assets.

To support the currency, Brazil sold $197.3 million of foreign-exchange swaps today under a program announced in December. It also held an auction to extend maturities on swaps due in March, rolling over $516.3 million.

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