Brazil’s Swap Rates Decline on Bets Rate Increases to Be Limited

Brazil’s swap rates declined on speculation policy makers will limit interest rate increases after October’s presidential election.

Swap rates on contracts maturing in January 2017, a gauge of expectations for interest rates, dropped eight basis points, or 0.08 percentage point, to 11.37 percent at the close of trade in Sao Paulo. The real advanced 0.1 percent to 2.2574 per dollar.

Brazil’s benchmark rate will be at 11.75 percent by the end of next year, compared with a previous projection of 12 percent last week, according to a central bank survey of about 100 analysts published today. Their median forecast for inflation at the end of 2014 was reduced to 6.25 percent from 6.26 percent, the same survey showed.

“The market is betting inflation will be lower than initially expected next year,” Camila Abdelmalack, an economist at CM Capital Markets in Sao Paulo, said in a telephone interview. “That may pave the way for the central bank to increase rates at a slower pace.”

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

The real has advanced 4.6 percent this year, the best performance among 24 developing-country currencies tracked by Bloomberg, partly on speculation President Dilma Rousseff would lose her re-election bid in October and a new administration would bolster economic growth.

The first poll released since presidential candidate Eduardo Campos died last week showed his running mate, Marina Silva, would be statistically tied with Rousseff in a runoff election that would take place if no candidate in the first round gets more votes than all other competitors combined.

47% Support

Investors and analysts will be watching campaign developments and upcoming polls this week to evaluate the outlook for the election, according to Abdelmalack.

Silva had 47 percent support compared with 43 percent for Rousseff in a potential second-round vote, within the plus or minus 2 percentage point margin of error for the Datafolha poll published today on the Folha de S. Paulo website.

Brazil posted a trade surplus of $684 million in the week ended Aug. 17, compared with a $506 million deficit the previous week, according to a report today from the Trade Ministry in Brasilia.

To support the currency and limit import prices, the central bank sold swaps worth $197.1 million under an intervention program due to expire in December, and rolled over $493.8 million worth of contracts.

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