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Brazil Swap Rates Climb on Central Bank Outlook; Real Declines

Brazil’s swap rates rose to a three- week high on a signal that the central bank may increase borrowing costs to contain inflation.

Swap rates on the contract due in July 2015 increased four basis points, or 0.04 percentage point, to 8.16 percent at 6 p.m. in Sao Paulo, the highest on a closing basis since Oct. 17. The real depreciated 0.2 percent to 2.0510 per dollar.

Policy makers won’t hesitate to raise the target lending rate from a record low 7.25 percent if necessary, a government official with knowledge of the bank’s monetary policy said in an interview, asking not to be identified because discussions haven’t been made public. The central bank will boost borrowing costs as soon as May, trading in futures shows.

“The expectation is for higher inflation and with this the central bank could have to raise rates,” Luciano Rostagno, the chief strategist at Banco West LB do Brasil SA, said in a telephone interview from Sao Paulo. “This news is giving futures an upward trend.”

The central bank sees raising interest rates as the best way to combat inflation while macro-prudential measures such as higher capital and reserve requirements to curb credit growth are only complementary to monetary policy, the government official said in the interview.

Keeping borrowing costs unchanged for a “prolonged time” is still the best strategy to ensure inflation will slow to policy makers’ target of 4.5 percent next year, central bank President Alexandre Tombini said in a Nov. 7 interview.

Containing Inflation

Economists such as Enestor dos Santos at Banco Bilbao Vizcaya Argentaria SA said the comments signaled the government would adopt alternative measures such as tax cuts and macro- prudential measures to contain inflation.

Inflation as measured by the IPCA index will end 2012 at 5.46 percent, according to the median forecast in a central bank survey of about 100 economists published today, up from a 5.44 percent estimate a week ago. Economists held their inflation projection for the end of 2013 at 5.40 percent.

IPCA consumer prices increased 5.45 percent in October from a year earlier, the national statistics agency reported Nov. 7, compared with a 5.28 percent boost in the prior month.

Policy makers have cut the benchmark rate by 5.25 percentage points since August 2011, the most among the Group of 20 nations. Economic growth is forecast to slow to 1.5 percent this year from 2.7 percent in 2011, according to the median forecast among economists surveyed by Bloomberg.

The real declined today along with most emerging-market currencies as investors sought out dollars on demand for a refuge from Europe’s sovereign debt crisis.

Brazil’s central bank has sold reverse currency swaps to keep the real weaker than 2 per dollar to support exporters. It sold $1.4 billion of contracts Oct. 25, $1.6 billion Oct. 23, $1.3 billion Oct. 5, $5.7 billion Sept. 12 through Sept. 17 and $350 million Aug. 21. The August reverse swaps were the first since March.

To contact the reporters on this story: Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net; Josue Leonel in Sao Paulo at jleonel@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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