Brazil Swap Rates Drop on Inflation Report; Real Little Changed

Brazil swap rates fell the most in three weeks as a measure of inflation was lower than analysts forecast, reinforcing speculation policy makers will hold off on raising benchmark borrowing costs from a record low.

Swap rates on contracts due January 2015 fell seven basis points, the most since Dec. 26, to 7.81 percent at 4:21 p.m. in Sao Paulo. The real was little changed at 2.0416 per dollar.

Getulio Vargas Foundation’s IGP-M index of wholesale, construction and consumer prices rose 0.34 percent in the second reading for January, less than the median forecast of 0.38 percent in a survey of 21 economists by Bloomberg. Producers’ prices for both raw materials and agricultural goods fell from the previous month, while increases for consumers’ housing and apparel expenses were slower than in December.

“There was an unexpected deflation of agricultural products, which is even more surprising in January, when food costs generally surprise on the upside,” Flavio Combat, an economist at Concordia Corretora, said in a phone interview from Rio de Janeiro. “We also had a small drop in growth forecasts that weighed a bit on the market.”

Analysts cut their economic growth estimates for a third straight week, with the median forecast for 2013 dropping to

3.19 percent from 3.2 percent the week before, according to a central bank weekly survey of about 100 financial institutions.

The central bank held the benchmark lending rate at a record-low 7.25 percent last week for the second straight meeting, saying the domestic recovery was “less intense” than expected and the balance of risks for inflation worsened in the short term.

Retail Sales

While retail sales rose for the sixth straight month in November, the rate of growth from a year earlier slowed to 8.4 percent from 9.1 percent in October. Industrial production in November fell for the second time in three months.

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.

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 is in line with the markets abroad, which are flat due to the U.S. holiday,” said Reginaldo Siaca, a currency manager at Advanced Corretora. “The real is apparently near its ceiling and the central bank could roll over swaps that are due to mature.”