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Brazilian Swap Rates Extend Weekly Decline as Economy Contracts

Brazil’s swap rates extended their fifth straight weekly decline after the economy shrank in March for the first time this year, adding to speculation that the central bank will limit further increases in borrowing costs.

Swap rates on contracts maturing in January 2016 fell four basis points, or 0.04 percentage point, to 11.75 percent at the close of trade in Sao Paulo, extending their drop since May 9 to eight basis points. The stretch of weekly decreases is the longest since October 2012. The real rose 0.2 percent to 2.2148 per dollar and was little changed for the week.

The central bank reported today that Brazil’s seasonally adjusted economic activity index, a proxy for gross domestic product, dropped 0.11 percent in March from the prior month in the first decrease since December. While economists raised their 2014 median growth forecast to 1.69 percent in a central bank survey published May 12, the projected pace is still slower than last year’s 2.28 percent expansion.

“Puny growth lowers expectations for the rest of the year,” economists at Rosenberg Associados including Thais Zara said in an e-mailed research note to clients.

The real has climbed 6.7 percent this year in the best performance among 24 emerging-market currencies, gaining partly on speculation President Dilma Rousseff will face a runoff in the October election.

Policy makers have raised the target lending rate at nine straight meetings, lifting it from a record low 7.25 percent in April 2013 to a two-year high of 11 percent to curb inflation.

Consumer prices increased 6.28 percent in the 12 months through April, the fastest pace in 10 months. Luiz Awazu Pereira, a central bank director, said in Paris this week that the effect of food price shocks is subsiding.

To support the currency and limit import price increases, Brazil sold $198.3 million of foreign-exchange swaps today under a program announced in December. The central bank also rolled over contracts that were due June 2 and worth $247.3 million.

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