Dovish Brazil Central Bank Sends Swap Rates Lower as Real Gains

  • Bank says weak domestic economy justified leaving rate on hold
  • Real gains after Fed seen postponing next U.S. rate increase

Brazil’s swap rates plunged to a four-month low as dovish minutes from the central bank’s latest meeting led traders to cut bets on interest-rate increases.

Swap rates on contracts due January 2017 fell 0.25 percentage point to 14.45 percent in Sao Paulo as the central bank signaled in minutes of its latest meeting that a weak domestic economy and global slump justify holding interest rates. The contracts have dropped 0.695 percentage point since the central bank surprised economists who had expected an increase in borrowing costs by keeping the benchmark at 14.25 percent at a meeting Jan. 20. The real jumped 1 percent to 4.0697 per dollar on bets that the Federal Reserve will refrain from raising interest rates anytime soon.

Brazilian policy makers are caught between two competing priorities: putting a lid on inflation that’s running at the highest in 12 years and making sure that higher borrowing costs don’t damage an economy already forecast to be headed for the worst recession in more than a century. The minutes reinforced speculation that the government has pressured the central bank to prioritize economic growth for the time being, according to Camila Abdelmalack, an economist at CM Capital Markets in Sao Paulo.

The “perception is that the monetary policy will be driven by political reasons, not macroeconomic ones,"  Abdelmalack said.

In the minutes released Thursday, the majority of policy makers said the bank needs to monitor the impact of changes in the domestic and international economies, which may help slow inflation toward its target of no more than 6.5 percent. Consumer prices increased 10.67 percent in December from a year earlier.

Brazil has the highest benchmark interest rates among major economies and has raised it more than any other in the past 12 months. Still, considering that economists’ inflation projections have consumer-price increases exceeding the target until 2017, a strict reading of the central bank’s guidance suggests that near-term rate hikes cannot be ruled out, Alberto Ramos, the chief Latin America economist at Goldman Sachs Group Inc., wrote in a report to clients.

The government will announce as much as 50 billion reais ($12.3 billion) of new loans as it works to reignite growth amid the longest economic contraction in over a century as early as Thursday, according to a person familiar with the discussions. Finance Minister Nelson Barbosa is expected to make the announcement with President Dilma Rousseff as she presides over a meeting of the Council for Economic Development. Barbosa will also reaffirm a commitment to fiscal adjustment, the person added, asking not to be identified because the speech is not public yet.

The real, which has plummeted 37 percent in the past year, the most among major currencies, gained as comments by the Federal Reserve on Wednesday reduced traders’ estimates for the probability of a March rate increase in the U.S. Crude headed for a three-day advance, also helping boost currencies of commodity-exporting nations.

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