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Brazilian Swap Rates Rise on Tombini Comments; Real Declines

Brazil’s swap rates rose for a third day as central bank President Alexandre Tombini reaffirmed plans to hold off on further cuts in borrowing costs.

The contract due in January 2015 climbed six basis points, or 0.06 percentage point, to 7.65 percent at close in Sao Paulo. The real depreciated 0.1 percent to 2.0787 per U.S. dollar.

Stability in monetary conditions is the best way to assure inflation slows to the central bank’s target, Tombini said today at a Senate hearing in Brasilia. Swap rates tumbled last week as Itau Unibanco Holding SA forecast policy makers will resume cutting borrowing costs next year after a report showed gross domestic product expanded in the third quarter at half the pace economists forecast.

“He reaffirmed the idea that rates are going to remain stable for a prolonged period,” Andre Perfeito, the chief economist at Gradual Investimentos, said by phone from Sao Paulo. “This definitely buries the idea that there will be a rate cut in the short term.”

Policy makers led by Tombini left the target lending rate unchanged at a record low 7.25 percent last month, following 10 straight reductions. Traders use interest-rate swaps to bet on the direction of borrowing costs.

Gross domestic product in the largest emerging economy after China 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 reported on Nov. 30.

Rate Outlook

Swap rates show traders are betting that policy makers won’t cut the target lending rate again before raising it, a reversal from Dec. 7, when they projected a reduction by July.

Brazil’s annual rate of consumer prices as measured by the IPCA gauge has exceeded the 4.5 percent midpoint of the central bank’s target range for 27 consecutive months. Yearly inflation unexpectedly accelerated to 5.53 percent in November from 5.45 percent the month before, the statistics agency reported Dec. 7.

The real pared losses yesterday after Aldo Mendes, a director at the central bank, said the currency is weaker than models indicate it should be.

“The central bank has made it very clear that the currency is making them uncomfortable,” Marcelo Fonseca, an economist at M Safra & Co. DTVM in Sao Paulo, said in a phone interview. “They would like it to fluctuate within a band of 2 to 2.1 per dollar, which doesn’t exacerbate inflation and helps industry be more competitive.”

Weekly Rally

The real gained 2.9 percent last week, the biggest five-day advance since January, as the central bank intervened after the currency touched a three-year low Nov. 30. It also rose as the government reduced the 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.

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.

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