Brazil Swap Rates Rise on Inflation Outlook; Real Little Changed

Brazilian swap rates climbed to a two-week high on speculation policy makers will extend borrowing-cost increases after raising inflation estimates.

Swap rates due in January 2015 rose seven basis points, or 0.07 percentage point, to 10.31 percent, the highest since Sept. 17. The real was little changed at 2.2165 per dollar.

Brazil must use monetary policy to control inflation that remains at an “uncomfortable” level, central bank director of economic policy Carlos Hamilton told reporters in Brasilia yesterday. The comments are a sign that the bank will raise the target rate to 10 percent by year-end, according to Alvise Marino, a currency strategist at Credit Suisse Securities.

“We’ve had hawkish comments from the central bank,” Marino said in a telephone interview from New York.

The real gained the most among 16 major currencies yesterday after central bankers said in their quarterly inflation report that consumer prices will rise 5.7 percent next year even if they raise the target lending rate to 9.75 percent by year-end. The projection three months earlier was for annual inflation of 5.2 percent.

Brazil’s central bank sold $498 million of currency swap contracts today, part of a $60 billion intervention announced in August to stem the currency’s declines.

The real has gained 9.9 percent since the program was announced Aug. 22, the best performance among dollar counterparts tracked by Bloomberg. The real climbed 7.6 percent in September, the most since October 2011.

Policy Outlook

Traders are wagering that policy makers will increase the benchmark lending rate to 10 percent by the end of 2013, swap rates show. The central bank will lift borrowing costs by a half-percentage point for a fourth straight meeting in October to 9.5 percent, and an additional 50 basis points to 10 percent in November, trading shows.

As recently as Sept. 27, traders were forecasting a 25 basis point increase in November.

The central bank has raised borrowing costs by 175 basis points since April to 9 percent, the biggest jump in the world.

OGX Petroleo & Gas Participacoes SA said it will miss a $45 million payment on dollar bonds today, moving former billionaire Eike Batista’s oil and natural gas producer to the brink of the biggest corporate default in Latin America.

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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