Brazil Swap Rates Drop for Third Day; Currency Little Changed

Brazil’s swap rates fell for a third day as Europe’s debt crisis threatened global growth and spurred speculation that policy makers in Latin America’s biggest country will refrain from raising borrowing costs.

Swap rates on the contract due in January 2015 declined one basis point, or 0.01 percentage point, to 8.57 percent. The real was little changed at 1.9827 per U.S. dollar, after earlier falling as much as 0.4 percent.

“The swap rates reflect what is going on abroad,” Luis Otavio de Souza Leal, the chief economist at Banco ABC Brasil SA in Sao Paulo, said in a phone interview. “The central bank showed in the minutes that one of the factors generating caution in monetary policy is the uncertainty abroad and the increase in risk aversion.”

Minutes of the central bank’s March 5-6 meeting, published last week, indicated that an increase in the 7.25 percent target lending rate wasn’t imminent as policy makers said that “a cautious management of monetary policy” was needed. Traders pared back bets today on an increase in Brazil’s benchmark rate after an unprecedented levy on Cyprus’s bank savings revived concern Europe’s debt crisis may worsen.

Analysts covering Brazil’s economy lowered their inflation forecast for 2013 to 5.73 percent from 5.82 percent while raising it to 5.54 percent from 5.50 percent for next year, according to the median of about 100 estimates in a central bank survey published today.

Inflation Outlook

Economists lowered their inflation forecast because consumer tax cuts on food staples will help contain price increases, according to Souza Leal.

“The market showed that it only sees this impact as temporary since they decreased the inflation forecast for 2013 and raised it for 2014,” Souza Leal said.

Longer-term swap rates rose, with the contract due in January 2017 rising three basis points to 9.36 percent, as inflation concerns persisted, said Paulo Petrassi, a portfolio manager at Leme Investimentos in Florianopolis.

“The markets were digesting the news on Cyprus throughout the day, and since domestic inflation continues to be worrying, the swap rates came back to adjust for that,” he said in a telephone interview.

After the real closed at a 10-month high of 1.9442 on March 8, it weakened three days later as the central bank intervened by selling $1 billion of reverse foreign-exchange swaps, helping exporters. The currency has rallied 3.5 percent this year, the best performance among emerging-market currencies after Thailand’s baht and Mexico’s peso.

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