Brazil Swap Rates Rise on Economic Activity Gain

Brazil’s swap rates rose after a bigger-than-forecast increase in November economic activity bolstered wagers that the central bank will refrain from cutting borrowing costs today.

Swap rates on the contract due in January 2015 climbed five basis points, or 0.05 percentage point, to 7.76 percent, its second straight daily increase. The real depreciated 0.3 percent to 2.0424 per U.S. dollar, falling the most among the 16 major currencies after Britain’s pound.

The seasonally adjusted economic activity index, a proxy for gross domestic product, rose 0.4 percent in November, the central bank reported today. The median forecast of economists surveyed by Bloomberg was for a 0.2 percent increase.

“The indicator was a surprise in relation to the market’s estimates,” Alfredo Barbutti, an economist at Liquidez DTVM in Sao Paulo, said in a phone interview.

Policy makers have left the benchmark rate at a record low 7.25 percent since October. The central bank will hold borrowing costs steady at its two-day meeting that ends today, according to all of the 56 economists surveyed by Bloomberg.

Swap rates also climbed as inflation in Brazil’s seven biggest cities accelerated in the month through Jan. 15 more than forecast. Consumer prices as measured by the IPC-S index climbed 0.89 percent after an increase of 0.77 percent in the prior period, the Getulio Vargas Foundation reported today. The median forecast of 20 economists surveyed by Bloomberg was for a 0.83 percent boost.

The nation’s consumer prices as measured by the IPCA index increased 0.79 percent in December from a month earlier, the fastest pace since March 2011, the government reported Jan. 10. The annual inflation rate has exceeded the 4.5 percent midpoint of the central bank’s target range for 28 consecutive months.

Inflation View

“The market does not believe inflation is converging to the central bank’s target,” Barbutti said.

The real declined along with most of the other major currencies tracked by Bloomberg as investors sought refuge in dollar assets after the World Bank cut its global growth forecast for 2013, citing austerity measures and high unemployment in developed nations. The Washington-based bank projected yesterday that the world’s economy will expand 2.4 percent, down from a June forecast of 3 percent.

“The market is cautious,” Barbutti said. “The European economy is still stuck. There are doubts about inflows this year, and if it’s negative, the tendency of the dollar will be to strengthen.”

Brazil’s central bank cut its 2012 growth forecast to 1 percent last month, compared with a 2.7 percent expansion in 2011 and a 7.5 percent increase in 2010. Expansion of the world’s sixth-largest economy will rebound to 3 percent to 4 percent this year, Finance Minister Guido Mantega said Dec. 27.

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