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Saturday, October 13, 2012

Brazil Swap Rates Fall on Central Bank Signal; Currency Gains

Brazil swap rates dropped toward a record after the central bank signaled it will keep borrowing costs at an all-time low for an extended period.


Swap rates on contracts due in July 2014 fell four basis points, or 0.04 percentage point, to 7.71 percent at 11:51 a.m. in Sao Paulo. They fell to a record low 7.69 percent Oct. 5 and Oct. 9.

Longer-term swap rates tumbled, with the yield on the contract due in January 2022 dropping 24 basis points, the most in four months, to a record low 9.44 percent. The real gained 0.2 percent to 2.0377 per dollar.

The eight-member central bank board cut the target lending rate by a quarter-percentage point to 7.25 percent yesterday, saying in its statement that keeping monetary conditions stable for a “sufficiently prolonged period” was the best way to balance inflation risks stemming from a domestic recovery with “complexity” in the global economy.

Three dissenters favored leaving borrowing costs unchanged. “The central bank gave quite a strong signal about the stability of interest rates,” Antonio Madeira, an economist at LCA Consultores, said in a phone interview from Sao Paulo.

“We see a reasonable probability that rates will stay stable until at least the fourth quarter of 2013.” Brazil’s policy makers have cut the target lending rate by 525 basis points since August 2011 to pump up the economy, more than any Group of 20 nation.

While yesterday’s statement indicated that the easing has ended, officials remain focused on growth even as price increases are forecast by economists to stay above the government’s 4.5 percent target until at least 2014.

‘Here to Stay’

Longer-term swap rates plunged on speculation policy makers will do everything they can to keep borrowing costs at record lows, Enestor Dos Santos, an economist at BBVA, said in a phone interview from Madrid. “My opinion is that low interest rates are here to stay,” he said.

The bank’s statement overshadowed faster-than-expected retail sales in August, which climbed as tax cuts and record-low borrowing costs helped revive demand.

The volume of sales rose 10.1 percent from a year earlier, the national statistics agency said today in Rio de Janeiro. The median forecast of 35 economists surveyed by Bloomberg was for a 9.1 percent increase.

The real advanced for the first time in three days as a U.S. report showed applications for jobless benefits dropped to a four-year low, encouraging demand for emerging-market assets, although the decrease may reflect difficulty adjusting the data for seasonal swings at the start of a new quarter.

2012 Decline

The currency has fallen 8.3 percent in 2012, the worst performance among the dollar’s 16 most-traded counterparts tracked by Bloomberg.

Brazil’s government has supported industry by raising tariffs and imposing barriers on capital inflows. The central bank sold $5.7 billion in reverse currency swaps Sept. 12 through Sept. 17 to contain the real and auctioned $1.3 billion Oct. 5.

Economists were divided before yesterday’s central bank meeting, with some highlighting the need to contain inflation.

Traders boosted bets on a rate cut after board member Luiz Awazu Pereira compared the global slowdown with Japan’s lost decade after the collapse of its asset bubble in 1990.

The Bank of Korea followed Brazil by lowering its benchmark lending rate today for the second time this year, reducing it to 2.75 percent from 3 percent after the International Monetary Fund cut its forecast for global economic growth this year to 3.3 percent.

Speculation that cuts in Brazil’s borrowing costs have come to an end was bolstered by the three dissenters who voted to keep rates unchanged, Dos Santos said.

“There are two clear signs the cutting cycle ended,” he said.

“The first one is these three guys who voted for stable rates. The second is the bank talked about stability for a prolonged period. It’s impossible to be more clear than that.”

bloomberg.com

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