BofA Joins Itau in Defying Swap Trade on Brazilian Rate Outlook

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Bank of America Corp. and Itau Unibanco Holding SA disagree with the consensus of swap traders that Brazil will raise interest rates two more times this year after Wednesday’s increase.

Rising unemployment and a drop in inflation-adjusted wages underscore a weaker economy, Ilan Goldfajn, the chief economist at Itau, said in a research report to clients. Analysts in a central bank survey forecast that Brazil’s gross domestic product will shrink 1.1 percent in 2015, which would be the worst performance since 1990.

“Weaker economic activity will lead policy makers to end the hiking cycle at the current level of 13.25 percent,” Goldfajn wrote, adding that a strengthening currency supports the central bank in its effort to curb inflation.

Swap rates, a gauge of expectations for Brazil’s borrowing costs, signal increases of 0.25 percentage point in June and July. The contract maturing in January 2017 climbed 0.25 percentage point to 13.47 percent in Sao Paulo. They were up 0.09 percentage point in April.

The decision to raise the target lending rate by another half-percentage point to 13.25 percent took into account “the macroeconomic scenario and the inflation outlook,” policy makers said in their statement, reiterating their assessment after the March meeting.

“The same language used in the statement allows the central bank to do a similar move, but with the economy deteriorating fast, we should not see more hikes this year,” David Beker, the chief Brazil economist at Bank of America Merrill Lynch, said by telephone from Sao Paulo.

Beker said policy makers will cut the benchmark rate by 0.25 percentage point at meetings in October and November.

The real fell Thursday the most among 31 currencies tracked by Bloomberg as Brazil’s budget deficit unexpectedly widened in March to 69.2 billion reais ($23.1 billion). The real dropped 1.8 percent to 3.0145 per dollar, paring its rally in April to 6 percent. That’s the first monthly gain since August.

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