Brazil Swap Rates Rise on Fuel Price Speculation; Real Declines

Brazil’s swap rates rose to a two-month high as a newspaper report saying the government may raise fuel prices fueled speculation that policy makers will speed up the pace of borrowing-cost increases to tame inflation.

Swap rates on the contract due in January 2015 rose for a fourth day, increasing 13 basis points, or 0.13 percentage point, to 10.15 percent at 10:04 a.m. in Sao Paulo, the highest on a closing basis since June 21. The real fell 0.8 percent to 2.3436 per dollar even as the central bank sold 40,000 currency swap contracts worth $493 million.

The Brazilian government may authorize state-run Petroleo Brasileiro SA to increase fuel prices to bolster its profits, Sao Paulo-based newspaper Valor Economico reported today, citing an unnamed source at the presidential palace. The Finance Ministry didn’t immediately respond to a request for comment when contacted by Bloomberg News. The real reversed an earlier gain, declining against the dollar with most of its emerging-market dollar counterparts.

“We have a stronger dollar and news that the government may increase fuel prices,” Newton Rosa, the chief economist at SulAmerica Investimentos in Sao Paulo, said in a phone interview. “Inflation was lower in the past but the trend now is for it to increase.”

Annual inflation slowed to 6.27 percent in July from 6.70 percent in June, according to the national statistics agency. The central bank targets annual price increases of 4.5 percent, plus or minus two percentage points.

Brazil’s currency has lost 14 percent in the past three months, the most among major emerging-market currencies, boosting the cost of imports.

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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