Brazil Swaps Decline to 20-Month Low on Inflation Outlook

  • Inflation on course to reach target next year: central bank
  • Consumer confidence index climbs to highest since January 2015

The Slow Unraveling of Brazil, Explained in Two Minutes

Brazilian swaps traders slashed estimates on borrowing costs after the central bank said it sees inflation slowing below the target next year.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, dropped 0.07 percentage point to 12.15 percent, the lowest since January 2015, Tuesday in Sao Paulo. The real advanced 0.3 percent to 3.2343 per dollar.

The swap rate has fallen more than half a percentage point since the end of August as traders increased bets that the central bank’s new president, Ilan Goldfajn, will cut rates in October. That view was boosted Tuesday when policy makers said in their quarterly inflation report that consumer price increases will be within the official target next year for the first time since 2009, and conditions for an easing of monetary policy are improving.

"The central bank makes it clear that there is a very high probability of a cut in October, which in my opinion will be of 50 basis points," said Leonardo Monoli, a partner at Jive Asset in Sao Paulo. He expects policy makers to embark on a series of cuts totaling as much as 4 percentage points.

The cost of living will rise 4.4 percent next year in the reference scenario, according to the report, below the 4.5 percent inflation target and the bank’s previous forecast of 4.7 percent. 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 last week. Twelve-month inflation decelerated to 8.78 percent, its slowest pace since May 2015.

The real rose as the Getulio Vargas Foundation reported Tuesday that seasonally adjusted consumer confidence climbed to the highest since January 2015.

The central bank forecasts gross domestic product will shrink 3.3 percent in 2016, which would be the second straight year of recession.

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