Brazil’s Swap Rates Fall on Rousseff View; Real Rallies Further

Brazil’s swap rates dropped the most in a week after President Dilma Rousseff said yesterday that economic conditions allow lower borrowing costs to support the nation’s growth.

The real extended its rally beyond 2 per U.S. dollar a day after the central bank intervened in the foreign-exchange market to boost the currency and contain inflation, reducing the need for policy makers to raise interest rates. Lower borrowing costs will always increase investment and consumption, Rousseff said in a speech in Brasilia to mayors.

“Rousseff’s commentary should push down swap rates,” Alfredo Barbutti, an economist at Liquidez DTVM in Sao Paulo, said in a phone interview.

Swap rates due in January 2015 dropped seven basis points, or 0.07 percentage point, to 7.87 percent at the close of trading in Sao Paulo. The real gained 0.5 percent to 1.9859 per dollar, the strongest closing level since July 2.

The currency rallied yesterday beyond 2 per dollar for the first time in almost seven months as the central bank sold $1.85 billion of foreign-exchange swap contracts at an auction that surprised traders.

Policy makers may be willing to allow the real to further appreciate to 1.98 per dollar in the short term to ease inflation as long as the currency’s gains aren’t too fast, Flavia Cattan-Naslausky, markets strategist at Royal Bank of Scotland Group Plc, said today in an e-mailed report.

“A grind would be more politically tolerable than a collapse,” she wrote.

Currency Intervention

The central bank swung in 2012 between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by preventing the real from strengthening beyond 2 per dollar.

The outlook for inflation is getting worse in the “short term” while the recovery of domestic activity was less intense than expected, the central bank said in minutes of its Jan. 15-16 policy meeting published last week.

The best way to curb consumer price increases is to keep the target rate at a record low for a “sufficiently prolonged period,” policy makers said. The board held the target lending rate at 7.25 percent for a second straight meeting.

The currency intervention reduced the need for the central bank to raise rates and control price gains, helping to push swap rates lower today, Barbutti said.

“The rates had been rising because the central bank recognized in the minutes of its last meeting that inflation expectations were worsening, and the market sees the bank’s intervention caused by quickening inflation,” he said.

Inflation Outlook

Consumer prices will rise at an annual rate of 5.67 percent in 2013, according to the median forecast in a central bank survey of about 100 analysts published yesterday. That compares with a projection of 5.65 percent in the previous week.

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 rose 5.84 percent in December from a year earlier after increasing 5.53 percent in the prior period, the national statistics agency reported Jan. 10.

Economic growth slowed to 1 percent last year, the central bank estimates, following expansion of 2.7 percent in 2011 and 7.5 percent in 2010.

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