Brazil Swap Rates Fall on Slower Inflation

Brazil’s swap rates dropped after a report indicated inflation slowed more than forecast, fueling speculation the central bank will keep borrowing costs at record lows to support the economy.

Swap rates due in January 2015 fell two basis points, or 0.02 percentage point, to 7.77 percent at the close in Sao Paulo after rising nine basis points yesterday, the most this month. The real was little changed at 2.0408 per dollar.

The IGP-M inflation index, dominated by producer prices, increased 0.41 percent in the 10 days through Dec. 31 from a month earlier, slower than the 0.50 percent median forecast of 14 analysts surveyed by Bloomberg, after climbing 0.69 percent in the prior period, the Getulio Vargas Foundation reported today. The annual rate of consumer price increases as measured by the IPCA gauge has exceeded the 4.5 percent midpoint of the central bank’s target range for 27 consecutive months.

“Food prices could surprise on the downside,” Enestor Dos Santos, an economist at BBVA in Madrid, said before the government’s report tomorrow on the IPCA index.

Producer prices for agricultural products rose 0.36 percent after the previous 0.93 percent increase, the Getulio Vargas Foundation reported today. The IGP-M index assigns a 60 percent weighting to producer prices, 30 percent for consumer prices and 10 percent for construction costs.

Dos Santos forecasts that the IPCA index rose 0.60 percent in December, matching the prior increase. The gauge climbed 0.74 percent from November and 5.79 percent from a year earlier, according to the median forecast of economists surveyed by Bloomberg.

Consumer Prices

Policy makers left the target lending rate at a record low 7.25 percent in November after 10 consecutive reductions since August 2011 to support growth. The central bank’s next decision is due Jan. 16.

Swap rates surged yesterday on concern the government won’t reach its target for energy price cuts, forcing policy makers to boost borrowing costs to curb inflation.

O Estado de S. Paulo reported Brazil’s government is weighing the risks of energy rationing as reservoir levels at hydroelectric dams fall. The newspaper cited an unidentified person within the federal administration.

Brazil “sees no risk of electricity rationing,” Deputy Energy Minister Marcio Zimmermann told reporters in Brasilia yesterday. The government’s target to cut electricity costs by 20 percent will still be met even as the low reservoir levels force the nation to run more expensive thermal plants to meet demand, Zimmermann said.

Intervention View

The currency’s gains were limited today amid speculation the central bank may intervene to prevent a further rally. Policy makers swung in 2012 between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond 2 per dollar.

“The real seems to be moving within a sort of band between about 2.03 and 2.04 per dollar because if it gains, the central bank could act,” Jose Carlos Amado, a currency trader at Renascenca DTVM in Sao Paulo, said in a phone interview.

The currency has gained 1.4 percent since Dec. 20, when Carlos Hamilton, the central bank’s director for economic policy, said officials consider an exchange rate of 2.05 as more “adequate” when creating economic forecasts than 2.10.

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