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Brazil Swap Rates Climb on Higher Inflation Forecast; Real Falls

Brazilian swap rates rose to a seven-week high after analysts covering the economy increased their 2012 inflation forecast, bolstering speculation the central bank may limit its cycle of borrowing-cost cuts.

Swap rates on the contract due in January 2014 increased six basis points, or 0.06 percentage point, to 7.92 percent, the highest closing level since June 27. The real dropped for the first time in four days, depreciating 0.1 percent to 2.0171 per dollar.

The median 2012 inflation forecast of about 100 economists in a central bank survey published today increased for a sixth week, rising to 5.15 percent. The economists reduced their growth forecast for this year to 1.75 percent even after recent signs that the economy may be picking up.

“The bigger the economic activity, the bigger the chance that the jump in food prices will pass through to inflation,” Vladimir Caramaschi, the chief economist of Credit Agricole SA’s Brazilian unit, said by phone from Sao Paulo.

Inflation accelerated in July for the first time in 10 months as adverse weather in Brazil and the U.S. drove up food prices. The inflation rate as measured by the IPCA index rose to a four-month high of 5.20 percent, the national statistics agency reported Aug. 8.

Swap rates climbed the most in almost three weeks on Aug. 16 after a report showed retail sales jumped 1.5 percent in June following a 0.8 percent drop in the prior month, adding to evidence that efforts to boost growth are starting to take hold. Economists underestimated monthly retail sales the most since Bloomberg began compiling the data in 2008.

Economic Activity

The seasonally adjusted economic activity index, a proxy for gross domestic product, rose 0.75 percent in June, the fastest pace since March 2011, the central bank said Aug. 17.

Brazilian President Dilma Rousseff may set aside as much as 14 billion reais ($6.9 billion) to grant striking civil servants a wage increase next year, a government official familiar with the negotiations said Aug. 16, asking not to be identified because figures are preliminary.

“There are inflation concerns,” Eduardo Galasini, the head of treasury at Banco Banif in Sao Paulo, said in a telephone interview. “There’s pressure from workers striking for wage increases, and it’s not clear if the government is going to yield on this.”

The central bank has cut the target lending rate by 4.5 percentage points since August 2011 to a record low 8 percent to support growth. Rousseff’s administration has reduced taxes on cars and appliances to bolster consumption.

The second preview of the Getulio Vargas Foundation’s IGP-M index rose at a faster pace than forecast, a report today showed. The gauge of producer and consumer prices and construction costs in the 20 days beginning July 21 increased 1.38 percent, compared with the 1.31 percent median forecast of 20 economists surveyed by Bloomberg.

Traders are projecting central bank President Alexandre Tombini will reduce the target lending rate to as low as 7.25 percent by October, according to rate futures yields.

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