Brazil Real Gains as Hamilton Says Depreciation Stokes Inflation

Brazil’s real rose to a one-month high after a central bank official said a weaker exchange rate has contributed to inflation.

Policy makers aren’t comfortable with a 5 percent annual rate of price increases, Carlos Hamilton, the bank’s director for economic policy, told reporters in Brasilia today. Brazil sees an exchange rate of 2.05 per dollar as more “adequate” when creating its economic forecasts than 2.10, Hamilton said.

The real advanced for a third day, appreciating 0.1 percent to 2.0693 per U.S. dollar at the close in Sao Paulo, the strongest level Nov. 14. Swap rates on contracts due in January 2015 increased 13 basis points, or 0.13 percentage point, to 7.82 percent, erasing a drop of three basis points.

“The central bank is concerned that the exchange rate could increase inflationary risks,” Roberto Padovani, the chief economist at Votorantim Corretora in Sao Paulo, said in a telephone interview.

Financial institutions are required to collect reserve requirements on short dollar positions above $3 billion starting today instead of the previous $1 billion level, the central bank announced Dec. 18 in a move to boost the local currency. A short is a bet an asset will lose value.

Swap rates climbed a day after Finance Minister Guido Mantega said Brazil will allow gasoline prices to rise in 2013, spurring speculation that the central bank will boost borrowing costs to contain inflation.

Currency Gain

The real has risen 1.4 percent this week, paring its drop in 2012 to 9.3 percent, still the worst performance among 16 major currencies tracked by Bloomberg.

Policy makers have swung this year between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond 2 per dollar. The central bank has sold $3.7 billion in currency swaps in November and December.

The central bank auctioned dollar credit lines for a fourth straight day to stimulate liquidity. The credit lines help boost the supply of U.S. currency as Brazilian companies send dollars abroad to balance their books at year-end.

December was headed for the biggest net outflow of dollars in two years as the central bank reported $4.2 billion this month through Dec. 14, compared with $4.3 billion in June 2010.

“In past years there were more inflows for investments in assets, and now there is less coming in with lower interest rates and less interest in the stock exchange,” said Ures Folchini, the head of fixed income at Banco WestLB do Brasil, in a phone interview from Sao Paulo. “And there’s a bit of that story of Mexico being attractive, which has led to less resources flowing to Brazil.”

Gasoline Prices

Swap rates erased an earlier drop on concern the central bank’s quarterly inflation report today didn’t take into account gasoline price increases next year.

Inflation will slow to 4.8 percent in 2013 under the reference scenario in which the target lending rate holds steady, compared with a 4.9 percent forecast in the September report, the central bank said today. It cut the 2012 growth forecast to 1 percent from 1.6 percent in its September quarterly report.

Finance Minister Guido Mantega told reporters in Brasilia yesterday that Brazil will “certainly” raise gasoline prices in 2013 and state-controlled Petroleo Brasileiro SA (PETR4) will announce the increase at the right time. Mantega is the company’s chairman.

Inflation View

“If we throw gas price hikes into the central bank’s projection, we would have 2013 inflation near 5.5 percent,” Fernando Genta, the chief economist at MCM Consultores in Sao Paulo, said in a phone interview.

Brazil’s annual rate of consumer price increases as measured by the benchmark IPCA index has exceeded the 4.5 percent midpoint of the central bank’s target range for 27 consecutive months. Annual inflation unexpectedly accelerated to 5.53 percent in November from 5.45 percent the month before, the statistics agency reported Dec. 7.

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.

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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