Brazil Swap Rates Rise as Falling Real Adds to Inflation Concern

Brazil’s swap rates climbed for a second straight day as the real’s decline toward a five-month low added to speculation that accelerating inflation will spur the central bank to extend borrowing cost increases.

Swap rates on contracts maturing in January 2016 rose seven basis points, or 0.07 percentage point, to 11.92 percent at 10:03 a.m. in Sao Paulo. The real depreciated 0.7 percent to 2.3606 per dollar after declining on Jan. 8 to 2.3968, the weakest level on a closing basis since Aug. 22.

The real has declined 7.9 percent in the past three months on concern fiscal deterioration under President Dilma Rousseff’s administration will lead to a lower credit rating and amid speculation that the tapering of Federal Reserve stimulus will undermine demand for Brazil’s assets.

“In the swap rates market, the real’s depreciation should pressure longer-term contracts,” Octavio de Barros, the chief economist at Banco Bradesco SA, said in an e-mailed research note to clients.

The central bank lifted the target lending rate by a half-percentage point for a sixth straight meeting last week, raising it to 10.50 percent. The decision came after the government reported that consumer prices rose 5.91 percent in 2013 even as central bank President Alexandre Tombini said in October that inflation would be less than the prior year’s 5.84 percent.

To support the real and limit import price increases, Brazil sold $198 million of foreign-exchange swaps today under program announced Dec. 18 that offers $200 million each trading day until at least June 30.

To contact the reporter on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net

To contact the editor responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net

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