Brazil Swap Rates Decline on Inflation Report; Real Depreciates

Brazil’s swap rates fell for a fourth straight day as a report showing slower-than-forecast inflation spurred speculation the central bank may refrain from raising borrowing costs this year.

Swap rates on the contract due in January 2015 dropped four basis points, or 0.04 percentage point, to 8.53 percent. The real slid 0.1 percent to 1.9843 per U.S. dollar after earlier falling 0.3 percent.

“The inflation reports that came out this morning help to explain today’s move” in swap rates, Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA, said in a phone interview. “Concern that the debt crisis in Europe may worsen also makes investors more cautions and pushes rates lower.”

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 “a cautious management of monetary policy” was needed.

Producer, construction and consumer prices, as measured by the IGP-M index, rose 0.24 percent from Feb. 21 through March 10, the Getulio Vargas Foundation reported today. The figure was less than the 0.25 percent median estimate of 15 economists surveyed by Bloomberg. In Sao Paulo, Brazil’s biggest city, consumer prices dropped 0.11 percent in the second week of March, the Foundation Economics Research Institute reported. That was more than economists surveyed by Bloomberg forecast.

The real pared losses on reduced demand for a refuge in the dollar after the European Central Bank said it will provide liquidity to Cyprus following the vote of the nation’s parliament against a levy on bank deposits.

Inflation View

The cooling in inflation signaled by today’s reports won’t make the central bank delay interest-rate increases unless the benchmark IPCA consumer price index also shows deceleration, according to Flavio Serrano, senior economist at Banco Espirito Santo de Investimento SA in Sao Paulo.

“Today’s numbers may have been good, but that’s not what the central bank is watching,” Serrano said in a phone interview. “There will be tranquility about inflation only when and if the IPCA slows down.”

The central bank’s preferred target for inflation, as measured by the IPCA, is 4.5 percent, plus or minus 2 percentage points. The annual rate of consumer price increases accelerated to a 14-month high of 6.31 percent in February, the national statistics agency reported March 8.

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