Brazil Swaps Drop to 22-Month Low as Inflation Trails Forecasts

  • Goldfajn says policy makers may cut rate with right conditions
  • Brazil’s real posts weekly gain after decline last week

Brazilian swaps traders reduced estimates on borrowing costs after inflation decelerated to its slowest pace in more than two years in September.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, dropped 0.05 percentage point to 11.96 percent, the lowest since November 2014, Friday in Sao Paulo. The real gained 0.2 percent to 3.2212 per dollar, leaving it up 1.3 percent this week.

Traders in the interest-rate futures market are now split between a reduction of 25 basis points or 50 basis points at the Oct. 19 policy-setting meeting after the benchmark consumer price index rose less in September than estimated by all 43 economists surveyed by Bloomberg. Ilan Goldfajn, president of the central bank, told the Wall Street Journal that the authority may begin easing monetary policy under the right conditions, including the passage of spending cuts and slower inflation, particularly in the services sector.

"The inflation data help push swaps down," said Mauricio Oreng, a senior strategist at Rabobank in Sao Paulo. "It makes sense to start cutting slowly as we still need confirmation on the drop in service inflation and the fiscal adjustment developments."

The real gained as much as as 1.1 percent earlier as U.S. payrolls rose less than forecast in September. The Federal Reserve is watching labor data closely to ascertain when it should raise rates, which could also dim appetite for Brazilian assets. The Fed’s benchmark rate of 0.25 percent to 0.5 percent compares with 14.25 percent in Brazil.

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