Brazil's Swaps Tumble as Central Bank Said to Consider Selic Cut

Updated on
  • Policy makers said to contemplate lower rates amid recession
  • Borrowing costs are currently at highest level since 2006

Brazilian swap rates, a measure of traders’ expectations of future borrowing costs, declined to a five-month low on speculation the central bank is considering an interest-rate cut to spur a rebound of Latin America’s largest economy.

Contracts maturing in January 2017 erased an earlier increase as a member of President Dilma Rousseff’s economic team, who asked not to be named, said policy makers see the possibility of cutting the Selic as early as this year amid the deepest recession in a century. While the real trimmed its 2016 slide on Monday, it’s still the worst performing among the world’s major currencies in the past 12 months.

Traders have pushed down the value of Brazil’s real over the past year as Rousseff struggles to contain the fastest inflation in 12 years without causing the economy to shrink further. Economists were surprised last month when the central bank balked at raising the key rate. Since then, analysts have changed their forecasts from hiking to no change in rates this year.

"Not only do we appear to have a deeply divided policy committee leaning away from its previous priority of bringing inflation and expectations back in line, but we have government sources now talking about possible rate cuts," Mike Moran, the head of economic research for the Americas at Standard Chartered Plc, said from New York. "This dissonance will do the currency no favors in the short term when global sentiment is as fragile as it has been."

Swap rates on contracts maturing in January 2017 fell 0.12 percentage point to 14.40 percent, after earlier advancing as much as 0.11 percentage point. The currency strengthened 0.9 percent to 3.9636 per U.S. dollar.