Brazilian Swap Rates Drop as Recession Pares Inflation Concern

Brazil’s swap rates declined to a one-month low as Latin America’s biggest economy slipped into a recession, adding to speculation that the central bank will limit further increases in borrowing costs.

Swap rates on the contracts maturing in January 2017 dropped by six basis points, or 0.06 percentage point, to 11.20 percent in Sao Paulo and declined 29 basis points in August. The real advanced 0.3 percent to 2.2359 per U.S. dollar and climbed 1.2 percent this month.

Brazil’s gross domestic product shrank by 0.6 percent in the April-June period from the previous three months after contracting a revised 0.2 percent in the first quarter, the national statistics agency said today. Policy makers kept the benchmark interest rate unchanged at its last two meetings after lifting it by 375 basis points to 11 percent in the year through April to curb inflation.

“Expectations for the year regarding the economy are deteriorating considerably,” Paulo Gala, a professor at the Getulio Vargas Foundation and a strategist at the brokerage unit of Banco Fator SA in Sao Paulo, said in a phone interview.

Speculation that President Dilma Rousseff will lose her re-election bid amid the first recession in five years has helped to push the real up 5.4 percent in 2014, the most among 31 major currencies tracked by Bloomberg.

Former Environment Minister Marina Silva would win 45 percent of voters’ support in an October runoff against Rousseff, who would garner 36 percent, according to an Ibope poll published Aug. 26. The survey questioned 2,506 people on Aug. 23-25 and had a margin of error of plus or minus two percentage points.

Silva’s Platform

Silva published her platform today, pledging less government intervention in currency markets, more-transparent public accounts and a clear commitment to the 4.5 percent inflation target.

To support the real and limit import price increases, Brazil sold $197.9 million of currency swaps today. Finance Minister Guido Mantega said this week that the country has maintained a floating exchange rate with “some” intervention.

Brazil’s economy will remain weak in 2015, Alberto Ramos, Goldman Sachs Group Inc.’s chief Latin America economist, wrote in a research report to clients. The bank lowered its growth forecast for this year to 0.25 percent from 0.75 percent.

Mantega told reporters in Sao Paulo today that the government will have to cut its 2014 economic growth estimate from the current 1.8 percent. The drought and fewer working days affected GDP in the first half, he said.

The central bank said in a report today that Brazil’s public sector posted a budget deficit of 32.7 billion reais in July, the largest since the financial crisis in December 2008. The primary deficit, excluding interest payments, was 4.7 billion reais, the biggest ever for the month.

Standard & Poor’s lowered Brazil by one step on March 24 to the lowest investment grade of BBB-, citing a sluggish economy and Rousseff’s expansionary fiscal policies.

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