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Brazil’s Swap Rates Drop to Seven-Month Low as Economy Weakens

Brazilian swap rates declined to a seven-month low as evidence of a weakening economy added to speculation that policy makers will limit further increases in borrowing costs.

Swap rates on contracts maturing in January 2016 fell 10 basis points, or 0.10 percentage point, to 11.20 percent at the close of trade in Sao Paulo, the lowest level on a closing basis since Oct. 31. They closed down two basis points this week. The real climbed 0.3 percent to 2.2243 per U.S. dollar, advancing 1 percent since June 6.

The central bank reported today that its economic activity index, a proxy for gross domestic product, dropped 2.29 percent in April from a year earlier. That was worse than the 1.85 percent contraction forecast by economists surveyed by Bloomberg. Slowing growth spurred the central bank to hold its target lending rate at 11 percent on May 28 after nine consecutive increases to curb inflation.

“Activity in the third quarter should be even weaker than what we have seen so far this year,” Solange Srour, the chief economist at ARX Investimentos in Rio de Janeiro, said in a telephone interview. “We don’t expect to see the central bank changing the benchmark lending rate again this year.”

Speculation that President Dilma Rousseff will face a runoff following October’s vote after overseeing a stalled economy and faster inflation has helped to push the real up 6.2 percent this year, the most among 24 emerging-market currencies.

Morgan Stanley said in a research report to clients that it cut its economic growth forecast for Brazil this year to 1 percent from 1.5 percent.

‘Dragged Down’

“We expect GDP growth in 2014 to continue to be dragged down by supply side weakness even as inflation remains elevated on the back of relatively resilient demand growth,” analyst Arthur Carvalho wrote in the report.

The World Bank cut this week its estimate for Brazil’s 2014 economic growth to 1.5 percent from 2.4 percent.

Consumer prices increased 6.37 percent in the 12 months through May, the fastest pace in almost a year and approaching the 6.5 percent upper limit of the official target.

To support the currency and limit import price increases, Brazil sold today $198.7 million of foreign-exchange swaps and rolled over contracts worth $494.4 million. The central bank announced June 6 that it was extending its intervention, which was initially scheduled to end this month.

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