Brazil Swap Rates Climb After Selic Decision; Currency Declines

Brazil’s swap rates rose on concern inflation will accelerate after the central bank said it plans to keep borrowing costs at a record low for a “prolonged period” and U.S. lawmakers expressed optimism they can avert a budget crisis.

Swap rates on the contract due in January 2014 climbed two basis points, or 0.02 percentage point, to 7.31 percent at the close in Sao Paulo. The real declined 0.2 percent to 2.0987 per dollar. The currency fell Nov. 23 to a three-year intraday low of 2.1172, spurring policy makers to intervene in the foreign-exchange market.

The central bank reiterated yesterday its intent to hold the target lending rate, known as the Selic, at a record low 7.25 percent as it tries to keep inflation within its target range of 2.5 to 6.5 percent without derailing the economic recovery. The bank’s decision to leave the rate unchanged at that level snapped a streak of 10 reductions.

“Nothing changed in the signals of monetary policy, and rates should remain at this level,” Flavio Serrano, a senior economist at Espirito Santo Investment Bank, said by phone from Sao Paulo. ‘The markets abroad are stronger, which is prompting people to charge more of an inflation premium.’’

The real also fell as currency-swaps traders pushed it lower before the central bank announces tomorrow the exchange rate for the end of the month, known as the Ptax, which serves as the reference for maturing contracts, said Andre de Carvalho Ferreira, director at Futura Corretora in Sao Paulo.

‘Speculative Movement’

“It’s a speculative movement,” he said in a telephone interview. “The market already has more people buying dollars at the end of the year because of companies’ remittances.”

The currency traded in a range of 2 to 2.1 per dollar from July 4 through Nov. 21 before touching the three-year low on Nov. 23 and prompting the central bank to intervene. A decline in the currency hurts Brazilian companies whose expenses are mostly in dollars.

The real rallied the most in four months on Nov. 23 as the central bank auctioned currency swaps for the first time since June, selling 32,500 contracts maturing in December valued at $1.6 billion. From August through October, the bank sold reverse currency swaps to keep the real weaker than 2 per dollar and make Brazil’s exporters more competitive.

The monetary policy committee’s unanimous rate decision, which was forecast by all 75 economists surveyed by Bloomberg, took into account the “the balance of risks for inflation,” the board said in its statement, which was almost identical to last month’s announcement.

Faster Inflation

Consumer prices, as measured by the IPCA-15 index, rose 5.64 percent in the month through mid-November compared with 5.56 in the prior period, the national statistics institute reported last week. Inflation will be faster than the 4.5 percent midpoint of policy makers’ target range through next year, a central bank survey of economists indicates.

The consumer default rate remained at 7.9 percent in October for the fourth straight month, the central bank reported today. That matches the highest since November 2009. The company loan default rate rose to 4.1 percent from 4 percent a month earlier.

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