Brazilian Swap Rates Fall on Mantega’s BNDES Outlook; Real Rises

Brazil’s swap rates dropped as Finance Minister Guido Mantega said the development bank will cut lending by 20 percent next year, helping to stem inflation.

Swap rates on contracts maturing in January 2016 fell three basis points, or 0.03 percentage point, to 11.39 percent as traders bet Mantega’s comments will allow central bankers to limit increases in borrowing costs. The drop in the swap rates was the biggest since Oct. 25. The real climbed for the first time in five days, appreciating 0.3 percent to 2.2465 per U.S. dollar today.

Mantega said in an interview Nov. 1 that state lender BNDES will provide about 150 billion reais in new loans in 2014, compared with an estimated 190 billion reais this year. Policy makers raised the target lending rate to 9.50 percent on Oct. 9 to curb consumer price increases, marking the fourth straight time they increased it by a half-percentage point.

“Less investment over time can cause downward pressure on swap rates,” Alex Agostini, the chief economist at Austin Rating in Sao Paulo, said in a telephone interview. “The market understands there should be just one more interest-rate hike.”

The annual rate of consumer price increases slowed to 5.75 percent through mid-October, still more than a percentage point above the central bank’s target. Economists raised their projection for inflation this year to 5.85 percent from 5.83 percent, according to the median estimate in a weekly central bank survey published today.

The real dropped 3 percent last week, the most since August, as the central bank pared back its efforts to support the currency and a widening budget deficit added to concern that the nation faces a credit rating cut.

Rollover Auctions

Brazil extended the maturities on only about $6 billion of the $8.9 billion of foreign-exchange swaps that matured Nov. 1 in rollover auctions last month. The real has climbed 8.4 percent since Aug. 22, when the central bank announced a $60 billion program of swap and credit-line auctions to buoy the currency and curb import price increases.

The intervention has been “successful” and will last at least until December, the central bank’s executive director for monetary policy, Aldo Mendes, said at an event in Sao Paulo on Nov. 1. The central bank is committed to ensuring that inflation is on a declining path, he said.

Equity portfolio managers stepping up their purchases of Brazilian stocks have helped fuel the real’s gains, Samarjit Shankar, managing director of global strategy at Bank of New York Mellon Corp., said in an e-mailed research note to clients today. The Bovespa benchmark stock index entered a bull market Sept. 9 after rising 20 percent from this year’s low July 3.

Brazil’s Deficit

Brazil reported last week a budget deficit of 22.9 billion reais in September, wider than the 19.3 billion reais median forecast of economists surveyed by Bloomberg, adding to concern that the nation’s credit rating may be lowered. As a percentage of gross domestic product, the deficit increased to 3.3 percent in September, the largest since 2009.

Standard & Poor’s and Moody’s Investors Service lowered their outlooks this year on Brazil’s credit, which both companies rate at two levels above junk.

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