Brazil’s swap rates rose after the central bank said government efforts to revive growth through tax breaks and increased expenditures have stoked inflation, damping speculation borrowing costs will be further reduced.
Swap rates on contracts due in January increased two basis points, or 0.02 percentage point, to 7.28 percent. The real advanced for the first time in five days, gaining 0.3 percent to 2.0296 per U.S. dollar, paring its drop in the third quarter to 1 percent.
The balance of risks for inflation moved to neutral from favorable while fiscal policy shifted from neutral to “slightly expansionary,” the central bank said today in a quarterly report. It raised its 2012 consumer inflation forecast to 5.2 percent from 4.7 percent.
“I found the report to be hawkish,” Solange Srour, the chief economist at BNY Mellon Arx Investimentos, said in a phone interview from Rio de Janeiro. “It suggests the borrowing cost cutting cycle has ended.”
Any future cuts in the target lending rate must be carried out with “maximum parsimony,” the central bank said, reiterating language used at its August meeting when it cut the Selic by a half-percentage point to a record low 7.5 percent.
Brazil’s September IGP-M index of producer, consumer and construction costs rose 0.97 percent from a month earlier, the Getulio Vargas Foundation reported today. The median forecast of 33 economists in a survey by Bloomberg was for a 0.94 percent increase.
The central bank said it will miss its inflation target for a second straight year as policy makers focus on spurring a recovery of the world’s largest emerging economy after China.
A boost in commodity prices means inflation is unlikely to converge to the 4.5 percent target until the third quarter of 2013, Carlos Hamilton, the bank’s economic policy director, told reporters in Brasilia. As recently as July, central bank President Alexandre Tombini said inflation would slow to the midpoint of 2.5 percent to 6.5 percent by year-end.
The central bank has cut the target rate by 5 percentage points since August 2011, the most among the group of 20 nations. The government has trimmed taxes on company payrolls and consumer goods, reduced bank reserve requirements and announced a plan to cut electricity costs.
Trading in swap rates shows investors are divided on whether the central bank will end its reductions in borrowing costs or cut by an additional quarter-percentage point at the November meeting.
The real gained on speculation China will announce measures to bolster the equities market after the Shanghai Composite Index touched a level below 2,000 yesterday. China’s stocks surged the most in three weeks after Shanghai Securities News cited speculation that securities regulators will announce 10 measures to boost equities.
“The market becomes more optimistic whenever China, the U.S. or Europe take stimulus measures,” Jose Carlos Amado, a trader at Renascenca DTVM, said in a phone interview from Sao Paulo. “But you never know how long the optimism will last.”
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