Brazil Swap Rates Fall on Delayed-Tightening Outlook; Real Drops

Brazil’s swap rates dropped for a fifth straight day after a newspaper report indicated that the central bank will wait until May to lift borrowing costs from record lows instead of an increase next month.

Swap rates on the contract due in January 2015 declined one basis point, or 0.01 percentage point, to 8.52 percent at 3:20 p.m. in Sao Paulo after earlier decreasing seven basis points. The real slid 0.2 percent to 1.9887 per U.S. dollar.

Interest-rate increases will be decided by the central bank, not the market, Folha de S. Paulo reported today, citing unidentified government assistants. The central bank declined to comment when reached by Bloomberg News. Industrial confidence dropped in March for the first time in four months, a report showed. Swap rates fell even as global stocks rallied as European policy makers weighed bailout options for Cyprus.

“The market may be adjusting to this news that the central bank will only raise rates in May,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA in Sao Paulo, said in a phone interview. “These factors are offsetting signs of improvement abroad that could have pressured rates upward.”

Swap rates pared their decline after the U.S. Federal Reserve cited improvement in the labor market while maintaining its bond buying at a pace of $85 billion a month.

Minutes of the Brazilian central bank’s March 5-6 meeting 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. The monetary policy committee will next meet April 16-17 and May 28-29.

Target Rate

The central bank has maintained the target rate at a record low since October to avoid jeopardizing an incipient recovery without further fueling inflation.

“The Brazilian central bank said that it will proceed with caution in implementing monetary policy, so a delay in the beginning of the rate-hike cycle is possible,” analysts led by Ciro Matuo at Itau Unibanco Holding SA wrote in a research report yesterday.

Itau forecasts 100 basis points of tightening divided into four 25 basis point increases, beginning in May, according to the report.

An index of industrial confidence fell 2.3 percent this month to 104.2, according to a preview published today by the Getulio Vargas Foundation in Rio de Janeiro.

“The confidence data from the FGV is a signal that the recovery in industry may not be at a very robust clip,” Rostagno said.

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