Brazil Swap Rates Decline as Inflation Decelerates; Real Slips

Brazil’s shorter-term swap rates fell for the first time in seven days after a report showed inflation slowed, spurring speculation that policy makers will limit increases in borrowing costs.

Swap rates on the contract due in January dropped two basis points, or 0.02 percentage point, to 8.11 percent at 12:16 p.m. in Sao Paulo. They rose on May 20 to 8.13 percent, the highest since April 17, and held at that level yesterday. The real fell less than 0.1 percent to 2.0420 per dollar today as the current account deficit widened.

Consumer prices, as measured by the IPCA-15 index, climbed

0.46 percent in the month through mid-May after rising 0.51 percent in the prior period, the national statistics agency reported today in Rio de Janeiro. The median forecast of economists surveyed by Bloomberg was for a 0.49 percent increase. Annual inflation slowed to 6.46 percent, within the central bank’s target range of 2.5 percent to 6.5 percent, from

6.49 percent at the end of April.

“The IPCA was lower than expected,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA in Sao Paulo, said in a telephone interview. “This opens the door for the central bank to maintain the rhythm of 25 basis-point increases.”

Policy makers raised the target lending rate last month by a quarter-percentage point to 7.50 percent to curb inflation. The central bank’s board next meets May 28-29.

Inflation Target

Annual inflation has remained above the 4.5 percent midpoint of policy makers’ target range since central bank President Alexandre Tombini took office in January 2011. He reiterated yesterday that he will do whatever it takes to ensure consumer price increases will start easing in the second half of the year.

The real dropped as the central bank reported that Brazil’s current account deficit widened to $8.32 billion in April from $6.87 billion in the prior month. It was bigger than the $7.24 billion median forecast of 21 analysts surveyed by Bloomberg. Foreign direct investment fell to $5.72 billion, from $5.74 billion in March.

The currency’s seven days of declines is the longest losing streak since November. The real has traded in a range of 1.94 and 2.05 per dollar this years as policy makers fluctuated between selling currency swaps to prevent the currency from falling too much and offering reverse swaps to protect exporters by reining in gains.