Brazil’s Swap Rates Drop as Annual Inflation Unexpectedly Slows

Brazil’s swap rates declined as annual inflation unexpectedly slowed in July, adding to speculation that policy makers will limit further increases in borrowing costs this year.

Swap rates on contracts maturing in January 2017 dropped 14 basis points, or 0.14 percentage point, to 11.66 percent at the close of trade in Sao Paulo, paring their weekly increase to three basis points. The real climbed 0.5 percent to 2.2833 per U.S. dollar, erasing an earlier decrease. It was still down 1.1 percent since Aug. 1.

“Consumer price increases in July came below what we expected,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil SA in Sao Paulo, said in a phone interview. “That gives some relief for policy makers in the near term.”

The real rose as Interfax cited Russia’s defense ministry in reporting that military exercises near the Ukraine border are over, reviving demand for emerging-market assets. To support the currency and limit import price increases, Brazil sold $198.8 million of foreign-exchange swaps today and rolled over contracts worth $394.8 million.

Swap rates fell today as the national statistics agency reported that inflation slowed to 6.50 percent in July from 6.52 percent in the prior month. The median forecast of economists surveyed by Bloomberg was for an acceleration to 6.60 percent.

Policy makers held the target lending rate last month at 11 percent for a second straight meeting after nine consecutive increases to curb inflation.

Carlos Hamilton, the central bank’s economic policy director, reiterated yesterday at an event in Rio de Janeiro that higher borrowing costs haven’t had a full impact on inflation, which he said will ease even in a scenario contemplating a weaker currency. Policy makers aren’t considering a reduction in the target lending rate, he said.

Analysts surveyed by the central bank Aug. 1 cut their 2014 inflation outlook for a third straight week, lowering it to 6.39 percent. They pared their growth forecast to 0.86 percent, compared with last year’s 2.5 percent expansion.

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