Brazilian Swap Rates Rise on Higher Estimate for Borrowing Costs

Brazil’s swap rates increased to a one-month high after economists surveyed by the central bank raised their forecast for borrowing costs in 2015 after last week’s unexpected tightening of policy to curb inflation.

Swap rates on the contract maturing in January 2018 rose 14 basis points, or 0.14 percentage point, to 12.39 percent at the close of trade in Sao Paulo. The real fell 0.7 percent to 2.4953 per dollar after tumbling on Oct. 31 the most in three years as Brazil posted a record budget deficit in September.

The real dropped as newly re-elected President Dilma Rousseff faced the challenge of pulling Brazil out of recession, slowing above-target inflation and stemming deficits that threaten the country’s investment-grade status. Economists raised their estimate for the target lending rate at the end of 2015 to 12 percent from 11.5 percent, according to the median of about 100 forecasts in a central bank survey taken Oct. 31.

“With elections over, markets will trade on economic fundamentals,” Flavio Serrano, a senior economist at Banco Espirito Santo de Investimento SA in Sao Paulo, said in a telephone interview.

The real will rise to 2.47 per dollar by the end of this year and then fall to 2.8 per dollar by the end of 2015, Morgan Stanley said in research report published today. The bank said it still has doubts that the administration will follow through on an appropriate policy adjustment.

Policy makers unexpectedly raised the benchmark lending rate on Oct. 29 by a quarter-percentage point to 11.25 percent as inflation remained above target. The decision came three days after Rousseff defeated opposition candidate Aecio Neves by the tightest margin since at least 1945.

Inflation Target

Annual inflation remained at 6.62 percent in the 12 months through mid-October, faster than than the 6.5 percent upper end of the official preferred range.

The government reported today that while the trade deficit widened in October to $1.2 billion, the shortfall was smaller than the $1.4 billion forecast of economists. To support the real, the central bank sold currency swaps worth $197.5 million as part of an intervention program begun last year.

Standard & Poor’s downgraded Brazil in March for the first time in more than a decade to the lowest level of investment grade because of slower growth and what it said were deteriorating fiscal accounts.

Brazil’s budget deficit widened to 69.4 billion reais in September, more than twice the median forecast in a Bloomberg survey of six analysts. It was the biggest since the series of data began in December 2001.

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