Brazilian Swap Rates Fall as Inflation Slows; Currency Declines

Brazil’s shorter-term swap rates dropped after a report showing slower annual inflation spurred speculation that the central bank will ease the pace of increases in borrowing costs.

Swap rates due in January 2015 declined five basis points, or 0.05 percentage point, to 9.66 percent. The real depreciated 0.7 percent to 2.3141 per U.S. dollar, the weakest level since March 2009, on speculation Brazilian companies were buying the U.S. currency.

Annual inflation as measured by the benchmark IPCA consumer price index decelerated to 6.27 percent in July from 6.7 percent in June, the national statistics agency reported today. The central bank’s target range is 2.5 percent to 6.5 percent.

“The level of economic activity is weak and inflation is more or less behaving,” Paulo Gala, a strategist at Fator Corretora in Sao Paulo, said in a telephone interview.

The economy expanded 0.9 percent last year, the worst slump since the 2009 recession. Analysts surveyed by the central bank forecast gross domestic product will grow 2.24 percent in 2013 and inflation will end the year at 5.75 percent.

Policy makers have embarked on the biggest cycle of interest-rate increases among Group of 20 nations to curb inflation. The central bank raised the target lending rate by a half-percentage point on July 10 to 8.50 percent, the third consecutive rise this year from a record low 7.25 percent.

The declines in the real, which boost import prices, led Finance Minister Guido Mantega to cut tariffs last week on more than 100 imported products, including steel.

Transportation Drop

Consumer prices rose 0.03 percent in July from a month earlier, the slowest pace in three years, as food and beverages, clothing and transportation dropped.

Transportation prices fell 0.66 percent, the steepest one-month decline in a year, after the biggest protests in two decades in June forced authorities to cancel bus fare increases.

Some longer-term swap rates rose today on concern that the inflation relief will be short-lived, according to Luciano Rostagno, the chief strategist at Banco Mizuho in Sao Paulo.

“The benign reading for inflation in July is due to temporary factors or unique events, such as a reversal of bus fare hikes,” Rostagno said in a telephone interview. “We can’t say inflation is already slowing toward the center of the central bank’s target range. There are no consistent signs of structural inflation cooling.”

Currency Intervention

The real advanced yesterday from what was a four-year low on speculation the central bank will intervene to stem the currency’s declines to curb inflation.

Policy makers sold $1.7 billion of foreign-exchange swap contracts on Aug. 2 to support the real in the 21st day of auctions since May 31. The currency’s three-month historical volatility was 13.6 percent today, the highest among major Latin American currencies.

“The central bank has already sent the message it will intervene if there is a quick depreciation, so what we will see is a slow weakening,” Pedro Tuesta, a Latin America economist at 4cast Ltd. in New York, said in a phone interview.

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