Brazil Swap Rates Extend Weekly Increase on Tombini

Brazil’s swap rates extended their first five-day increase in a month as central bank President Alexandre Tombini reiterated this week plans to hold off on further cuts in borrowing costs.

Swap rates on the contract due in January 2015 rose seven basis points, or 0.07 percentage point, to 7.63 percent at the close in Sao Paulo, extending the weekly advance to 11 basis points, the first since the period ended Nov. 16. The real depreciated less than 0.1 percent to 2.0860 per dollar today and weakened 0.5 percent this week. The central bank plans to sell as much as $1.5 billion in two credit-line auctions on Dec. 17 to promote year-end liquidity.

Stability in monetary conditions is the best way to assure that inflation slows to the central bank’s target, Tombini said at a Senate hearing this week. Swap rates got a boost today as a report showed economic activity rebounded in October.

“The market is believing in the scenario put forth by the central bank, that it will keep rates stable next year,” Jorge Dib, a portfolio manager at Grau Gestao de Ativos in Sao Paulo, said in a phone interview. “Tombini himself discarded the idea of lower rates.”

The seasonally adjusted economic activity index, a proxy for gross domestic product, rose 0.36 percent in October after dropping 0.52 percent in the prior month, the central bank reported today. The median forecast of analysts surveyed by Bloomberg was for a 0.30 percent increase.

Quicker Inflation

Brazil’s annual rate of consumer price increases 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 in the prior month, the statistics agency said Dec. 7.

Swap rates plunged last week as Itau Unibanco Holding SA forecast the central bank will resume cutting borrowing costs next year after a report showed gross domestic product expanded in the third quarter at half the pace forecast.

The real has been supported by government signals that it doesn’t want the currency to depreciate further out of concern that inflation may quicken, Dib said.

A weaker currency won’t help boost competitiveness unless it is accompanied by inflation controls, Tombini said at this week’s Senate hearing.

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 weaker than 2 per dollar.

The bank will conduct foreign-exchange credit-line auctions Dec. 17 to boost liquidity as end-of-year company remittances squeeze the supply of dollars.

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