Brazil Swap Rates Drop on Lower GDP Outlook; Real Appreciates

Brazil’s swap rates dropped to a three-week low after economists cut their 2013 growth forecast, bolstering bets that the central bank will refrain from increasing borrowing costs at its policy meeting this week.

Swap rates on the contract due in January 2015 fell four basis points, or 0.04 percentage point, to 7.69 percent at the close in Sao Paulo, the lowest since Dec. 19. The real appreciated 0.1 percent to 2.0316 per dollar.

Brazil’s gross domestic product will expand 3.20 percent this year, according to the median forecast in a Jan. 11 central bank survey of about 100 analysts published today. The previous week they had projected 3.26 percent growth. Policy makers have left the benchmark rate unchanged at a record low 7.25 percent since October.

“There should be no debate,” Newton Rosa, the chief economist at SulAmerica Investimentos in Sao Paulo, said by phone. “They will leave the rate unchanged.”

Annual inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for 28 consecutive months. The IPCA index of consumer prices increased 5.84 percent in December from a year earlier after rising 5.53 percent in the prior month, the national statistics agency reported last week.

Analysts raised their 2013 inflation forecast for a second week, boosting it to 5.53 percent from 5.49 percent, according to today’s central bank survey.

‘Extremely Loose’

“Policy in Brazil today is extremely loose,” Tony Volpon and Mario Castro, New York-based analysts at Nomura Holdings Inc., wrote in a report. “Over this year, we should see both inflation and growth move higher as a result.” Nomura forecasts annual inflation will end the year “around 6 percent” while the economy will grow 3.5 percent.

Brazil’s monetary policy committee will hold the target rate steady at its Jan. 15-16 meeting, according to all 37 economists surveyed by Bloomberg.

The real rose today on speculation the U.S. will maintain stimulus measures that boost demand for emerging-market assets after Federal Reserve Bank of Chicago President Charles Evans said policy should stay accommodative.

“There is a good tone in the market abroad,” Francisco Carvalho, the head of currency trading at Liquidez DTVM in Sao Paulo, said in a telephone interview. “The real will trade in a range of 2.03 per dollar to 2.05.”

The real has gained 1.9 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.

The central bank sold currency swaps in November and December to stem the real’s declines. From August through October, the bank sold reverse currency swaps to keep the real weaker than 2 per dollar.

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