Brazilian Swap Rates Drop With Real on Dimmed Economic Outlook

Brazil’s swap rates fell as analysts lowered their economic growth forecasts and a report showed inflation slowed, adding to speculation that the central bank will limit further increases in borrowing costs.

Swap rates on contracts maturing in January 2015 dropped 10 basis points, or 0.1 percentage point, to 11.22 percent at the close in Sao Paulo, the lowest this month. The real depreciated less than 0.1 percent to 2.3895 per U.S. dollar.

The economy will expand 1.79 percent in 2014, down from a growth projection of 1.90 percent a week ago, according to the median estimate of about 100 analysts in a survey by the central bank. To curb inflation, Brazil lifted the target lending rate on Jan. 15 by a half-percentage point for a sixth consecutive meeting, increasing it to 10.50 percent.

“There is little confidence this will be a good year,” Paulo Petrassi, fixed-income manager at Leme Investimentos, said in a phone interview from Florianopolis, Brazil. “This could impact the decision regarding further rate hikes.”

Wholesale, construction and consumer prices rose 0.3 percent in the 30 days through Feb. 10 following a previous climb of 0.58 percent, the Getulio Vargas Foundation reported today. The median forecast of analysts surveyed by Bloomberg was for an increase of 0.34 percent.

Central bank economic policy director Carlos Hamilton said last week that inflation will remain elevated because of factors including a weaker real.

Declining Currency

The currency has dropped 3.1 percent in the past three months on concern fiscal deterioration will lead to a lower credit rating and amid speculation that the tapering of Federal Reserve stimulus will erode demand for emerging-market assets.

To support the real and limit import price increases, Brazil sold $197.6 million of foreign-exchange swaps today under a program announced in December. The central bank also held an auction to extend maturities on swaps due in March, rolling over $516.2 million.

Reports indicated contraction in December. The seasonally adjusted economic activity index, a proxy for gross domestic product, fell 1.35 percent from a month earlier, more than analysts surveyed by Bloomberg forecast. Retail sales declined for the first time in 10 months, while industrial output dropped as capital goods production plunged.

“Very weak data from December was the main reason for the worsening of expectations regarding economic growth,” Alessandra Ribeiro, an analyst at Tendencias Consultoria Integrada in Sao Paulo, said in a telephone interview.

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