Brazil’s swap rates climbed to a seven-week high on speculation quickening inflation will force central bankers to abandon their pledge to keep borrowing costs at a record low.
Swap rates on the contract due in January 2015 increased 11 basis points, or 0.11 percentage point, to 7.87 percent at close in Sao Paulo, the highest since Nov. 29. The real gained 0.2 percent to 2.0388 per dollar.
The central bank left the target lending rate at a record low 7.25 percent yesterday after reducing it 5.25 percentage points through October. The balance of risks for inflation worsened in the short term as the domestic recovery was “less intense” than expected, the monetary policy committee said in its statement after a two-day meeting.
“The central bank is attuned to the risks,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA in Sao Paulo, said in a telephone interview. “If inflation continues deteriorating, they could begin to prepare for a rate increase.”
The central bank ended the steepest rate-cutting cycle among Group of 20 nations in November after a jump in food prices fanned inflation.
Consumer prices in Sao Paulo, Brazil’s biggest city, rose 0.96 percent in the month through the first half of January, the Foundation Economics Research Institute said today. That exceeded the 0.91 percent median estimate of 22 economists surveyed by Bloomberg.
The nation’s consumer prices as measured by the IPCA index increased 0.79 percent in December from a month earlier, the fastest pace since March 2011, the government reported Jan. 10. The annual inflation rate has exceeded the 4.5 percent midpoint of the central bank’s target range for 28 consecutive months.
Swap contracts maturing in July 2014 or later rose while earlier contracts fell, reflecting the central bank’s concern about stimulating growth, said Joao Junior, a fixed-income trader at ICAP do Brasil CTVM in Sao Paulo.
“The central bank showed it’s watching inflation, but at the same time it said economic activity is weaker than expected,” Junior said in a telephone interview. “They want to say that they’re not going to cut again, but they’re also not going to hike to contain inflation expectations.”
Gross domestic product expanded 1 percent in 2012, according to the median estimate of 30 economists surveyed by Bloomberg. That is about half the pace of the U.S. and Japan, according to separate surveys.
Brazil’s currency may end 2013 stronger than 2 per U.S. dollar as the central bank seeks to tame inflation, Carlos Thadeu de Freitas Filho, an economist at Franklin Templeton Investimentos in Sao Paulo.
The real has gained 1.5 percent since Dec. 20, when Carlos Hamilton, the central bank’s director for economic policy, said officials consider an exchange rate of 2.05 per dollar as more “adequate” when creating economic forecasts than 2.10.
The central bank sold currency swaps in November and December 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, supporting exporters.