Brazil’s Swap Rates Decline Before Today’s Central Bank Decision

Brazil’s swap rates dropped to an eight-month low as a report indicating deflation added to speculation that the central bank will signal today that it will limit further increases in borrowing costs.

Swap rates on the contract maturing in January 2017 decreased five basis points, or 0.05 percentage point, to 11.36 percent at 4:29 p.m. in Sao Paulo, the lowest level on a closing basis since Oct. 30. The real slid 0.1 percent to 2.2220 per U.S. dollar.

The Getulio Vargas Foundation reported today that producer, construction and consumer prices fell 0.56 percent in the month through July 10, more than the 0.50 decrease forecast by economists surveyed by Bloomberg. A slowing economy spurred the central bank to hold its target lending rate at 11 percent on May 28 after nine consecutive increases to curb inflation.

“The decline surprised the market and was bigger than what we expected,” Octavio de Barros, the chief economist at Banco Bradesco SA, said in a research report to clients. “The result reinforces the moderation path seen for inflation.”

All 57 economists surveyed by Bloomberg forecast that policy makers will leave the benchmark Selic unchanged for a second straight meeting. The central bank’s board is scheduled to announce its decision after the close of markets.

Real’s Gain

The real has rallied 6.3 percent this year, the most among 24 emerging-market currencies, on speculation that President Dilma Rousseff is declining in popularity amid the slowest economic growth under any Brazilian president in two decades.

A Datafolha election poll commissioned by Folha de S. Paulo and Globo Comunicacao may be released today, according to the superior electoral court’s website.

To support the real and limit import price increases, Brazil sold $198.6 million of currency swaps today and rolled over contracts worth $346.5 million. The central bank plans to keep offering $200 million in swaps each business day at least through the end of the year.

Brazil posted a foreign-exchange outflow of $5.4 billion from July 1 to July 11, which would be the biggest monthly amount leaving the country this year.

As the October presidential election approaches, Rousseff is facing a combination of stalled economic growth and above-target inflation.

The government reported last week that the annual increase in consumer prices in June exceeded the 6.5 percent upper limit of the official preferred range as the World Cup pushed up the cost of hotel stays and airline flights.

Economists reduced their growth forecast for this year to 1.05 percent from 1.07 percent a week earlier, according to the median of about 100 estimates compiled for a central bank survey published July 14.

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