Swap Rates Increase on Heightened Inflation Outlook

CEIC Brazil Data Talk: Brazil’s swap rates (interest rate swaps) have been rising persistently since February 2013. As of June 2013, the 180-day and 360-day swap rates averaged 8.7450% and 9.2657% respectively, compared to the January 2013 averages of 7.0677% and 7.1707%. The increase in swap rates has been more obvious for longer maturities (180 days and 360 days), although rates for shorter-term swaps have also increased considerably. Rates for swaps due in 30 days and 60 days, for example, rose by 91 basis points and 102 basis points respectively from March 2013 to June 2013. Swap rates are often indicative of market expectations concerning possible changes in interest rates which are, in turn, based on the overall perception of a central bank’s response to inflation; Brazil’s consumer price index increased by 6.70% year-on-year as of June 2013, exceeding the upper limit of the 2013 inflation target of 4.5±2.0%. High inflation has been a recurring issue faced by the Central Bank of Brazil owing to large increases in food prices, especially over the past three quarters (food price growth has hovered around 11% year-on-year since October 2012). Indeed, the general increase in swap rates since February 2013 has been vindicated by the Central Bank’s eventual decision to raise the Selic target rate by 25 basis points during April 2013 (to 7.50%) and 50 basis points during May 2013 (to 8.00%). This was followed by a further 50 basis point increase in the Selic target rate in July 2013 (to 8.50%). According to the market expectations survey conducted by the Central Bank, the Selic rate is expected to rise to a median average of 9.25% for the calendar year. However, despite rising inflation, growth considerations mean that the Central Bank may ease back on any further measures to cool the economy. Brazil’s real Gross Domestic Product (GDP) rose by just 1.92% year-on-year as of the first quarter of 2013, after growing by 0.87% on average during 2012 (down from 2.73% in 2011). Weaker consumer confidence and slower growth in retail sales threaten to further slow the growth in private consumption. The seasonally adjusted consumer confidence index, compiled by the Getulio Vargas Foundation, declined in July by 10.94% year-on-year and growth in retail trade has been relatively muted – the retail trade volume index grew by just 4.16% year on year as of May 2013 (after increasing at around double that pace, or even slightly more, throughout 2012). At the same time, the Central Bank’s success in managing inflation has meant that further tightening measures may not be necessary, at least for the coming months. However, as the Central Bank’s Monetary Policy Committee (COPOM) reconvenes at the end of August 2013, there are broad expectations of a 50 basis point increase in the Selic target rate to remove any lingering inflationary pressures, even though inflation is also expected to systematically decline throughout the second half of 2013 after having accelerated during the third and fourth quarters of 2013. Consumer price inflation retreated to 6.27% as of July 2013 on account of reduced pressure from food prices and transportation costs. This view is consistent with the July 2013 Central Bank survey of market expectations where the median estimate of consumer price inflation for this calendar year was 5.75% in July 2013, compared to 5.80% and 5.87% as of May 2013 and June 2013 respectively. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. By Bruno Vasconcelos - CEIC Analyst Back to Blog
20th August 2013 Swap Rates Increase on Heightened Inflation Outlook

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