Brazil’s Swap Rates Rise as Inflation Accelerates; Real Climbs

Brazil’s swap rates rose the most in six months, reversing yesterday’s plunge, as inflation unexpectedly accelerated and central bank President Alexandre Tombini reiterated that policy makers will keep borrowing costs stable for a prolonged period.

Swap rates on contracts due in January 2014 climbed 13 basis points, or 0.13 percentage point, to 7 percent at the close in Sao Paulo, the biggest increase since June. They dropped 23 basis points yesterday, the most since May. The real gained for a fifth straight day, appreciating 0.1 percent to 2.0751 per U.S. dollar. It rallied 2.9 percent this week, the most since Jan. 13.

“The inflation indicator was surprising, much higher than expected,” Newton Rosa, the chief economist at SulAmerica Investimentos in Sao Paulo, said in a phone interview. “And Tombini said GDP growth hasn’t changed policy makers’ evaluation and rates will stay stable.”

Swap rates fell yesterday the most in seven months as Itau Unibanco Holding SA forecast the central bank will resume cutting borrowing costs next year to bolster an economy that grew at half the pace analysts surveyed by Bloomberg had projected. The real posted its biggest five-day gain since January as Brazil removed capital controls this week that curbed appreciation and the central bank intervened following the currency’s drop on Nov. 30 to a three-year low.

Tombini View

Tombini told reporters in Brasilia last night that keeping monetary conditions stable for a “sufficiently prolonged period” is the best way to ensure inflation slows to the 4.5 percent midpoint of the central bank’s target range, repeating language in the statement following its Nov. 27-28 meeting.

Policy makers left the target lending rate at a record low 7.25 percent last month, ending 5.25 percentage points of cuts since August 2011. Traders use interest-rate swaps to bet on the direction of borrowing costs.

Annual inflation as measured by the IPCA index of consumer prices accelerated to 5.53 percent in November from 5.45 percent in the previous month, the national statistics agency reported today. The median forecast of 26 economists surveyed by Bloomberg was for a 5.42 percent pace.

Latin America’s largest economy grew 0.9 percent in the third quarter from a year earlier, less than half the 1.9 percent median forecast of economists surveyed by Bloomberg, the statistics agency said last week.

President Dilma Rousseff told reporters in Brasilia today that she won’t be influenced by The Economist magazine’s call for her to oust Finance Minister Guido Mantega following the report on the economy.

Inflation Outlook

Enestor Dos Santos, an economist at BBVA, wrote in an e-mailed report today that he raised his year-end inflation forecast to 5.5 percent from 5.4 percent and expects a 5 percent to 6 percent pace of increases for 2013 and 2014.

“Inflation pressures will be fueled by the tone of fiscal and monetary policies, the unwillingness to accept a sharper appreciation of the currency and by a more robust domestic demand,” Dos Santos wrote.

The real was the best performer this week among the dollar’s 16 most-traded counterparts tracked by Bloomberg as the central bank intervened and Brazil reduced the maturity of foreign loans subject to a 6 percent tax.

The central bank sold $2.1 billion in currency swaps Dec. 3 and $1.6 billion on Nov. 23 to stem the real’s declines. From August through October, the bank sold reverse currency swaps to keep the real weaker than 2 per dollar.

Policy makers have swung in 2012 between selling currency swaps aimed at preventing the real from depreciating too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening.

The real has still lost 10 percent this year, the most among major currencies tracked by Bloomberg. It tumbled 4.9 percent in November.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE