Brazil Swap Rates Rise as Inflation Exceeds Forecast; Real Gains

Brazil’s swap rates rose to the highest level in two weeks after a report showed inflation accelerated more than forecast, spurring speculation the central bank will boost borrowing costs.

Swap rates due in January 2015 climbed four basis points, or 0.04 percentage point, to 7.69 percent at 3:50 p.m. in Sao Paulo, the highest since Dec. 3 on a closing basis. The real advanced for a second day, appreciating 0.9 percent to 2.0696 per dollar, the biggest gain since Dec. 5.

Consumer prices as measured by the IPCA-15 price index rose 0.69 percent in the month through mid-December, the fastest pace in 19 months, the national statistics agency reported today. The median forecast of 41 analysts surveyed by Bloomberg was for a 0.64 percent increase. Annual inflation accelerated to 5.78 percent, compared with the 4.5 percent midpoint of the central bank’s target range.

“While inflation may not be out of control, it’s stabilizing at a very high level that is far from the target,” Thiago Carlos, an economist at Link Investimentos, said in a phone interview. The Sao Paulo-based brokerage raised its forecast for annual inflation this year to 5.8 percent from 5.7 percent following today’s data.

The real advanced a day after the central bank eased reserve requirements for bets against the dollar to boost the local currency.

Financial institutions will be required to collect reserve requirements on short dollar positions above $3 billion starting Dec. 20 instead of the previous $1 billion level. A short is a bet an asset will lose value.

‘It’s Cautious’

“The government would like a weaker real, but the central bank is showing it’s cautious with any impact on inflation,” Flavio Serrano, an economist at Banco Espirito Santo de Investimentos in Sao Paulo, said in a phone interview. “The central bank is taking back some of the barriers it has imposed on the currency.”

Policy makers have swung this year between selling currency swaps to prevent the real from depreciating too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening.

The central bank sold $2.1 billion in currency swaps on Dec. 3 and $1.6 billion on Nov. 23 to stem the real’s declines. From August through October, the bank sold reverse currency swaps to keep the real weaker than 2 per dollar.

Real’s Decline

The real has fallen 10 percent in 2012, the worst performance among 16 major currencies tracked by Bloomberg. The weakness in the exchange rate is inflating interest payments for Brazilian borrowers that have doubled dollar debt since 2009 and sapping profit at companies with expenses in U.S. currency such as Petroleo Brasileiro SA (PETR4) and Gol Linhas Aereas Inteligentes SA.

Policy makers left the target lending rate at a record low 7.25 percent last month following 10 straight reductions. Traders use interest-rate swaps to bet on the direction of borrowing costs.

Brazil will “certainly” raise gasoline prices in 2013, and state-controlled Petroleo Brasileiro SA will announce the increase at the right time, Finance Minister Guido Mantega told reporters in Brasilia today. Mantega is the company’s chairman.

Any fuel price increase will probably be less than 5 percent at the pump, Link’s Carlos said.

The central bank auctioned credit lines in dollars for a third straight day to boost liquidity as trading slumps at the close of the year.

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net; Marisa Castellani in Sao Paulo at mcastellani7@bloomberg.net

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

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