Brazil Swap Rates Decline After Central Bank Minutes; Real Falls

Brazil’s swap rates dropped as the central bank said in minutes of last week’s policy meeting that weak global growth will help curb inflation, spurring speculation that increases in borrowing costs will be limited.

Swap rates due in January 2015 fell three basis points, or 0.03 percentage point, to 8.25 percent at 11:40 a.m. in Sao Paulo, matching the lowest closing level since Feb. 14, which was reached April 23. The real depreciated less than 0.1 percent to 2.0119 per U.S. dollar.

The central bank said in minutes of its April 16-17 monetary policy meeting published today that internal and external “uncertainties” require caution from policy makers. Board members voted 6 to 2 to increase the Selic target lending rate by 25 basis points to 7.50 percent from a record low 7.25 percent.

“The Selic hikes won’t total more than 100 basis points,” Carlos Kawall, the chief economist at J. Safra in Sao Paulo, said in a telephone interview. “The minutes suggest a cycle of that magnitude will be enough to bring 2014 inflation to around 5 percent.”

Consumer prices rose at an annual rate of 6.59 percent in March, exceeding the upper limit of the central bank’s preferred range for the first time since November 2011. The target is 4.5 percent, plus or minus 2 percentage points.

Brazil’s swap rates tumbled the day after the meeting as the increase in borrowing costs was less than some analysts had forecast. A survey by Bloomberg showed that 18 of 58 analysts had projected an increase of 50 basis points.

Inflation ‘Resilience’

Policy makers said in their statement last week that “the high level of inflation” and “resilience of inflation” required a response tempered by the central bank’s recognition that “external uncertainties” also required “that monetary policy be managed with caution.”

Brazil’s unemployment rate rose to 5.7 percent in March from 5.6 percent in the prior month, the national statistics agency reported today. The median forecast of 33 economists surveyed by Bloomberg was for an increase to 5.9 percent.

The real was headed for a second straight week of trading weaker than 2 per dollar as policy makers swung this year between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by reining in gains.

Brazil’s central bank reported yesterday that foreign currency net outflow this year to date narrowed to $983 million as of April 19 from $5.1 billion a week earlier.

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