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Brazilian Swap Rates Rise on Inflation Outlook; Currency Climbs

Brazil’s swap rates rose to a two-week high after the central bank raised its forecast for 2014 inflation, adding to speculation that policy makers will sustain the pace of increases in borrowing costs.

Swap rates due in January 2015 climbed nine basis points, or 0.09 percentage point, to 10.23 percent at 10:09 a.m. in Sao Paulo, the highest level on a closing basis since Sept. 17. They extended their quarterly increase to 36 basis points. The real appreciated 0.9 percent to 2.22327 per dollar today, paring its drop since the end of June to less than 0.1 percent.

Central bank President Alexandre Tombini reiterated last week that policy makers must remain vigilant to prevent the real from weakening and fueling inflation. The central bank projects inflation at 5.7 percent in 2014 in the market scenario of its quarterly inflation report published today, up from the prior 5.2 percent forecast.

“The message from the central bank is that it will keep raising rates,” Flavio Serrano, senior economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a telephone interview. “The increase in the inflation forecast for 2014 was a surprise. The fact that the central bank took into account a more depreciated exchange rate changed the inflation dynamics.”

The real has rallied 9.2 percent since Aug. 22, when the central bank announced a $60 billion program to bolster the currency and curb inflation. The gain is the biggest among all of the world’s currencies tracked by Bloomberg.

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@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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