Brazil Swap Rates Drop as Economists Cut GDP Outlook; Real Falls

Brazil’s swap rates fell to a three-week low after economists cut their growth forecasts, spurring speculation that the central bank will limit the increase in borrowing costs at a policy meeting this week.

Swap rates due January 2015 declined nine basis points, or 0.09 percentage point, to 9.58 percent in Sao Paulo, the lowest closing level since June 14. The real weakened 0.5 percent to 2.2636 per dollar.

Economists lowered their growth forecast for this year to 2.34 percent from 2.40 percent a week ago, according to the median of about 100 estimates in a central bank survey published today. Policy makers will increase the target lending rate by a half-percentage point to 8.50 percent on July 10, according to the median forecast of analysts polled by Bloomberg.

“There is actually more room for downward adjustments in coming weeks” to economic growth forecasts, Enestor Dos Santos, economist at BBVA, said in a phone interview from Madrid. “We’re starting to see the impact of protests on consumption and the negative impact of inflation.”

Demonstrations swelled last month to more than 1 million people and spread from Rio de Janeiro, Sao Paulo and the capital, Brasilia, to cities across the country. The protests were sparked by an increase in bus fares and transformed into a catch-all for discontent over poor public services, corruption and inflation.

Growth Outlook

Consumer prices rose 0.26 percent in June after a 0.37 percent increase in May, Brazil’s statistics agency said last week. The increase was below the 0.33 percent median forecast of economists surveyed by Bloomberg. While annual inflation of 6.70 percent exceeded the 6.50 percent upper level of the central bank’s target range, it was slower than the 6.77 percent median forecast.

Brazil’s central bank cut its 2013 economic growth forecast to 2.7 percent from 3.1 percent in a report published June 27. They projected 6 percent annual inflation, assuming the target lending rate remains unchanged, compared with a March estimate of 5.7 percent.

Policy makers have increased the target lending rate twice this year from a record low 7.25 percent, lifting it by 25 basis points in April and an additional 50 basis points to 8 percent in May. The central bank monetary policy committee’s two-day meeting starts tomorrow.

Brazil sold $1.9 billion of currency swap contracts on July 5 to stem the real’s decline in the 12th day of intervention in five weeks. Central bank president Alexandre Tombini said June 18 that policy makers are working to reduce inflationary pressure that may stem from a drop in the real.

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