Brazil’s Swap Rates Drop to Nine-Month Low After Policy Decision

Brazil’s swap rates declined to a nine-month low as the central bank refrained from raising borrowing costs for a second straight meeting, adding to speculation that it will avoid further increases this year.

Swap rates on the contract maturing in January 2016 fell 10 basis points, or 0.10 percentage point, to 10.95 percent at the close of trade in in Sao Paulo, the lowest since Oct. 10. The real weakened 1.5 percent to 2.2582 per U.S. dollar in the biggest drop among 24 emerging-market currencies after the Russian ruble.

While policy makers said yesterday that they decided “at this moment” to hold the target lending rate at 11 percent as they weigh stalled economic growth against above-target inflation, swaps trading projects that Brazil won’t resume increasing borrowing costs until July 2015. A monthly proxy for gross domestic product dropped in May the most this year, the central bank reported today.

“We do not expect policy makers to change rates again this year,” Camila Abdelmalack, an economist at CM Capital Markets in Sao Paulo, said in a telephone interview.

The seasonally adjusted economic index decreased 0.18 percent in May from the prior month, the central bank reported. While the drop was smaller than the 0.40 percent decline forecast by analysts surveyed by Bloomberg, it is still the biggest since December, when activity fell 1.37 percent.

The Labor Ministry reported that employers added 25,363 formal jobs in June, less than the median forecast of economists surveyed by Bloomberg, which called for 53,500 new positions.

Downed Jetliner

The real extended its drop as demand for emerging-market assets fell after a Ukrainian Interior Ministry official said rebels shot down a Malaysian jetliner carrying 295 people over eastern Ukraine near its border with Russia.

“The incident with the Malaysian airplane in Russia affects Brazil indirectly and adds to a risk-off mode,” Christian Lawrence, a foreign-exchange strategist at Rabobank in New York, said in a telephone interview.

The real pared its rally this year to 4.6 percent, still the biggest among emerging-market currencies. The currency has climbed on speculation that Brazil’s President Dilma Rousseff is losing popularity as the October election approaches amid the slowest economic growth in two decades.

Analysts in a weekly central bank survey published July 14 cut their expectations for GDP growth in 2014 to 1.05 percent, compared with a 2.5 percent expansion last year.

Target Rate

Policy makers lifted the Selic target lending rate by 375 basis points in the year through April, giving Brazil the highest borrowing costs among rate-setting nations in the Group of 20. The tightening hasn’t curbed inflation, which at 6.52 percent last month was the fastest in a year and above the target range of 2.5 percent to 6.5 percent.

Central bank President Alexandre Tombini said in the transcript of an official July 1 interview that consumer prices haven’t been fully affected by the rate increases.

“Maintaining the Selic rate is a sign that the central bank is waiting to see the effects of previous rate hikes on prices,” Jose Francisco de Lima Goncalves, the chief economist at Banco Fator SA, said by phone.

To support the currency and limit import price increases, Brazil sold $198.8 million of foreign-exchange swaps today and rolled over $346.4 million worth of contracts. The central bank plans to keep offering $200 million in swaps each business day at least through the end of the year.

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