Brazil Swap Rates Rise on Faster Inflation Outlook; Real Drops

Brazil’s swap rates climbed as economists surveyed by the central bank raised their outlook for inflation, adding to speculation that policy makers will keep increasing borrowing costs.

Swap rates on contracts maturing in January 2017 rose three basis points, or 0.03 percentage point, to 12.46 percent in Sao Paulo, pushing the quarterly increase to 18 basis points. The real fell 0.5 percent to 2.2719 per dollar, paring its gain in the past three months to 4 percent, still the best performance after the Indonesian rupiah among 24 emerging-market currencies tracked by Bloomberg.

Economists lifted their 2014 inflation forecast to 6.3 percent from 6.28 percent, according to the median of about 100 estimates in a central bank survey published today. Swap rates indicated that Brazil will increase benchmark borrowing costs by 25 basis points to 11 percent on April 2.

“Inflation remains as a strong concern, and expectations for numbers to come are not good,” Vladimir Caramaschi, the chief strategist at Credit Agricole do Brasil SA in Sao Paulo, said in a phone interview. “There will be a hike in the benchmark this week, and the market is going to pay close attention to how the central bank communicates after that.”

The currency gained this quarter partly on speculation the reduction in the nation’s credit grade to the lowest investment grade by Standard & Poor’s on March 24 will be the only downgrade this year as the rating company shifted the outlook to stable from negative.

Tombini Outlook

Central bank President Alexandre Tombini reiterated on March 29 that Brazil will carry out an “austere” economic policy and maintain exchange-rate flexibility.

Brazil has raised benchmark borrowing costs by 75 basis points this year to 10.75 percent, the largest increase among major economies after Turkey.

To support the currency and limit import price increases, Brazil sold $198.5 million of foreign-exchange swaps today under a program announced in December. The central bank refrained from rolling over about $3 billion of $10.6 billion of contracts expiring tomorrow.

“The central bank may be attempting to see how the market works without heavy-handed intervention,” Juliano Ferreira Neto, an analyst at Icap do Brasil in Sao Paulo, said in a telephone interview.

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net; Filipe Pacheco in Sao Paulo at fpacheco4@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Dennis Fitzgerald, Richard Richtmyer

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