Brazil’s real rose to a five-month high on bets the central bank will control inflation (BZPIIPCY) by allowing the currency to advance as policy makers phase out increases in borrowing costs before the presidential vote.
The real gained for a third straight day, climbing 0.8 percent to 2.2016 per U.S. dollar today in Sao Paulo, the strongest closing level since Oct. 30. Swap rates on contracts maturing in January 2017 decreased 13 basis points, or 0.13 percentage point, to 12.17 percent.
Policy makers signaled last week that they were preparing to end the world’s longest monetary tightening cycle amid slow economic growth as President Dilma Rousseff is expected to seek re-election in October. Annual inflation remains faster than the 4.5 percent target after the central bank raised the benchmark lending rate by 3.75 percentage points over the past year.
“With the monetary tightening cycle over, or at least almost over, the central bank can turn to the foreign-exchange rate to control inflation,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil in Sao Paulo, said in a phone interview. “The exchange rate can have a quicker impact on inflation than rate hikes, so the government could be making that strategic move to control inflation before elections.”
While raising the target lending rate by 0.25 percentage point to 11 percent on April 2, policy makers removed language that had appeared in their previous statement about continuing to increase borrowing costs.
Inflation accelerated to 6.08 percent in the 12 months through March, according to the median forecast of economists surveyed by Bloomberg before tomorrow’s report from the national statistics agency.
The worst drought in more than a half-century pushed food and beverage prices up 1.11 percent in the month through the middle of March, more than twice the prior rate.
Interest rates will rise further in 2015 as prices controlled by the government for items including energy and fuel are expected to increase after the election, Deives Ribeiro, trading manager at Fair Corretora, said by phone.
The real rose yesterday as Rousseff’s support fell to 38 percent this month from 44 percent in February in a Datafolha poll that pitted her against opposition candidates Aecio Neves and Eduardo Campos. She still had more than the level of backing a candidate would need to win the first round of voting.
To support the currency and limit import price increases under a program announced in December, the central bank sold $198 million of foreign-exchange swaps today. It also extended the maturity on contracts due in May worth $494.4 million after resuming rollovers last week.
Stronger U.S. growth this year and next will help the global economy withstand weaker recoveries in emerging markets including Brazil, the International Monetary Fund said in a report today. The fund’s growth outlook this year for the South American country was lowered to 1.8 percent from 2.3 percent.