Brazil Swap Rates Rise as Mendes Damps Bets for Selic Reduction

Brazil swap rates rose after a measure of prices climbed faster than forecast and a central bank official said the benchmark interest rate is at an “adequate” level, dimming the outlook for a reduction.

Swap rates on contracts due January 2014 rose five basis points, or 0.05 percentage point, to 7.05 percent. Swap rates show traders are betting that policy makers won’t cut the benchmark rate again before raising it, a reversal from Dec. 7 when they expected a reduction by July.

The real depreciated 0.1 percent to 2.0773 per dollar, paring losses of as much as 0.4 percent after Aldo Mendes, a director at the central bank, said the currency is weaker than models indicate it should be. The IGP-M index first preview, which is 60 percent weighted in wholesale prices, rose 0.5 percent in December, exceeding the median forecast for a 0.34 percent increase among 13 economists surveyed by Bloomberg.

“There was a strong reversal in food prices that had been falling,” Andre Perfeito , the chief economist at Gradual Investimentos, said in a phone interview from Sao Paulo. “That spike in inflation suggests the central bank will be more cautious with changes in the benchmark rates.”

Food prices rose 0.91 percent while agricultural products increased 0.93 percent, according to the index data released today.

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. The bank targets inflation of 4.5 percent, plus or minus 2 percentage points.

Benchmark Inflation

Brazil’s benchmark annual inflation rate, measured by the IPCA gauge, has exceeded the midpoint of the central bank’s target for 27 consecutive months. Annual inflation unexpectedly quickened to 5.53 percent in November from 5.45 percent the month before, the statistics agency said Dec. 7.

Inflation will accelerate to 5.58 percent by year-end, according to a weekly central bank survey of about 100 economists released today. They had forecast year-end inflation of 5.43 percent the week before. The economists cut their growth forecast for this year to 1.03 percent from 1.27 percent the week before.

Brazil will provide liquidity to the foreign exchange market as needed as the country typically has a liquidity shortage at the end of the year, Mendes said today at an event in Rio de Janeiro. The country doesn’t target any specific foreign exchange rate, he added.

The central bank said Dec. 7 that it is assessing demand for currency swap contracts and credit lines in dollars.

The real gained 2.9 percent last week, the biggest one-week advance since January as the government reduced maturity of foreign loans subject to a 6 percent tax to one year from two years and exempted exporters from the same level of tax on some borrowing.

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