Brazil’s Swap Rates Drop on Outlook for Currency; Real Declines

Brazil’s shorter-maturity swap rates fell as economists scaled back forecasts for the real’s drop, boosting speculation that the central bank will delay increases in borrowing costs as the exchange rate helps curb inflation.

Swap rates due in July 2013 dropped two basis points, or 0.02 percentage point, to 7.06 percent at the close in Sao Paulo. The real fell 0.4 percent to 1.9954 per dollar, the weakest level since Jan. 28.

The currency will end the year at 2.05 per dollar, according to the median forecast of about 100 economists in a central bank survey published today, stronger than the 2.07 they estimated a week earlier. The real rallied to a level beyond 2 per U.S. dollar on Jan. 28 for the first time since July after the central bank intervened by selling $1.85 billion of foreign-exchange swaps as inflation accelerated.

“Last week’s swap auction sent a strong message that the central bank won’t allow the real to depreciate further,” Darwin Dib, the chief economist at CM Capital, said in a phone interview from Sao Paulo.

On Jan. 31, Brazil removed a 6 percent tax on foreign investment in real estate funds traded on the stock exchange, spurring speculation that inflows will sustain the real. Finance Minister Guido Mantega said the previous day that the government is ready to block exaggerated appreciation.

Today’s central bank survey incorporates the recent “interventions in the real, which caused the currency to appreciate,” Concordia Corretora economists led by Flavio Combat said in an e-mailed report.

Currency Intervention

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

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 central bank held its benchmark at 7.25 percent for a second straight meeting.

Longer-term swap rates rose today after the Foundation Economics Research Institute’s consumer price index for Sao Paulo rose 1.15 percent in January, compared with the 1.06 percent median foreacst of 13 economists surveyed by Bloomberg.

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, quickening from the 5.53 percent annual pace in the prior month.

Inflation Outlook

Economists in the central bank survey lifted their inflation forecast for the end of 2013 to 5.68 percent from 5.67 percent a week earlier. Swap rates due in July 2017 rose seven basis points to 9 percent.

The economists held their growth forecast for gross domestic product at 3.1 percent for 2013, compared with the monetary authority’s estimate of 1 percent expansion last year.

President Dilma Rousseff seeks GDP growth of at least 3.5 percent this year, with an expansion probably accelerating in the second half, O Estado de S. Paulo reported, citing a government official it didn’t identify. The Finance Ministry declined a request for comment from Bloomberg News.

Before it's here, it's on the Bloomberg Terminal.