Brazil Swaps Drop to Eight-Month Low as Inflation Decelerates

  • Slowing price rises point to rate-cutting as soon as October
  • Henrique Meirelles says 2016 rate cut “highly probable”

Brazilian swaps traders slashed bets on borrowing costs after the country’s finance minister said the key rate is likely to fall this year as inflation decelerated more than all analysts forecast in the month through mid-September.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, dropped 0.11 percentage point to 12.25 percent, the lowest since January, Thursday in Sao Paulo. Inflation measured by the IPCA-15 index slowed to 0.23 percent in September from the previous month after a 0.45 percent increase a month earlier, the national statistics agency said Thursday. Twelve-month inflation decelerated to 8.78 percent, its slowest pace since May 2015.

On Wednesday, Finance Minister Henrique Meirelles, speaking in an interview in New York, said it’s "highly probable" the benchmark interest rate will fall this year for the first time since 2012. The central bank is monitoring data to determine when it might kick off a monetary easing cycle and is aiming for inflation to slow to its 4.5 percent target next year. Traders are betting inflation will slow enough for the monetary authority to begin lowering the rate at their October meeting.

"This new inflation data points to an improvement in inflation going forward, which was one of the conditions the Central Bank set for the rate-cutting cycle to begin,” said Mauricio Oreng, a senior strategist at Rabobank in Sao Paulo.

Central bank chief Ilan Goldfajn on Tuesday expressed optimism that President Michel Temer can succeed in his efforts to contain spending and shore up the budget, saying during a panel discussion in Argentina that the government is "on the right track."

The central bank is focused primarily on inflation, but will take into account government efforts to contain spending, Meirelles said. The administration expects Congress to approve a cap on public spending this year, he said.

"We need to get confirmation that Congress is working with the executive to give central bank President Goldfajn the green light to start decreasing rates," said William Landers, a portfolio manager at BlackRock Inc in New York. "I don’t think he’s going to be jumping the gun until the fiscal side is really going in the right direction."

The real fell on Thursday afternoon as companies with expenses in foreign currency took advantage of an earlier gain against the dollar to buy greenbacks. The Brazilian currency declined 0.4 percent to 3.2206 per dollar after earlier strengthening as much as 0.8 percent.

Investors lured by Brazil’s high benchmark interest rate of 14.25 percent -- more than 28 times the U.S. equivalent -- have turned the real into the world’s best performing currency this year.

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