Brazil Swap Rates Rise as Inflation Beats Forecasts; Real Falls

Brazil’s swap rates climbed as the nation’s broadest measure of inflation accelerated more than all of the forecasts of economists, adding to speculation that the central bank will keep raising borrowing costs.

Swap rates on contracts maturing in January 2017 increased 16 basis points, or 0.16 percentage point, to 12.43 percent at close in Sao Paulo, reducing its drop this week to 30 basis points. The real fell 0.1 percent to 2.2612 per U.S. dollar as a budget report failed to ease fiscal concern after Brazil’s credit rating was cut four days ago. The currency pared its weekly rally to 2.8 percent, still the biggest since September.

The Getulio Vargas Foundation said its IGP-M index of wholesale, construction and consumer prices rose 1.67 percent in March, faster than the median forecast of economists surveyed by Bloomberg, which called for a 1.53 percent increase. To curb inflation, Brazil has raised the target lending rate by 75 basis points this year to 10.75 percent, the largest boost among major economies after Turkey.

“The swap rates market should react to the IGP-M acceleration even though the recent gains in the real would suggest less inflationary pressure in months to come,” Octavio de Barros, the chief economist at Banco Bradesco SA, said in an e-mailed research note to clients.

Can Brazil Compete in the International Economy?

The real weakened today as Brazil reported a primary budget surplus, excluding interest payments, of 2.1 billion reais in February, down from 19.9 billion reais in the prior month.

The nation is on course to meet its primary surplus goal of 1.9 percent of gross domestic product this year, Tulio Maciel, the head of the central bank’s economics research, told reporters in Brasilia.

‘Fiscal Improvement’

“Government officials reinforced the focus on fiscal improvement, but data still does not reflect that,” Bank of America Corp. said in an e-mailed research report.

The real posted the biggest gain yesterday among 24 major emerging-market currencies tracked by Bloomberg as a drop in President Dilma Rousseff’s popularity fueled speculation that she will struggle to win re-election after back-to-back years of sputtering growth.

Her approval rating fell to 51 percent from 56 percent, an Ibope poll published by the National Industry Confederation showed yesterday. It was the first decline since July, when street protests pushed her popularity to a record low.

Evidence of ebbing support for Rousseff came the same week Standard & Poor’s lowered the nation’s credit rating to the lowest level of investment grade, saying sluggish economic growth and an expansionary fiscal policy are increasing the Latin American nation’s debt.

The real tumbled 13 percent last year, the biggest annual drop since the 2008 global financial crisis, partly in anticipation of the reduced credit rating. To support the currency and limit import price increases, the central bank sold $198.3 million of foreign-exchange swaps under a program announced in December. It also rolled over $494.3 million in contracts that are due April 1.

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

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

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