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Brazil’s Swap Rates Climb on Inflation Outlook; Real Advances

Brazil’s swap rates rose on renewed speculation that policy makers may increase benchmark borrowing costs this year to contain inflation running faster than the central bank’s target.

Swap rates rose, with the contract due in January 2015 increasing 16 basis points, or 0.16 percentage point, to 8.45 percent at the close of trading in Sao Paulo. The real advanced 0.3 percent to 1.9633 per dollar, after earlier gaining as much as 0.5 percent. U.S. markets are closed today for a national holiday.

Finance Minister Guido Mantega said last week that the government will do whatever it takes to fight inflation and signaled an interest-rate increase may be an option. The pace of price increases in Brazil reached a one-year high of 6.15 percent in January and has exceeded the 4.5 percent mid-point of policy makers’ target for more than two years.

“The official discourse about inflation has changed,” Flavio Serrano, a senior economist at Banco Espirito Santo de Investimentos, said by phone from Sao Paulo. “It’s possible that they’ll use a mix of policies, with the currency a little stronger and some increase in borrowing costs.”

The central bank has reduced benchmark borrowing costs by 5.25 percentage points since August 2011 in the most aggressive cuts among Group of 20 nations.

GDP Growth

Economists lowered their Brazil growth forecasts, predicting gross domestic product will expand 3.08 percent this year and 3.65 percent in 2014, according to the median estimate in a central bank survey of about 100 analysts published today. That compares with last week’s projections for growth of 3.09 percent in 2013 and 3.80 percent next year. The analysts also cut their forecast for 2013 inflation for the first time since November, to 5.70 percent from 5.71 percent.

Consumer prices in Brazil’s seven biggest cities, as measured by the IPC-S index, rose 0.55 percent in the month through mid-February, less than the 0.62 percent forecast of 18 economists surveyed by Bloomberg.

Today’s reduced GDP forecasts and better-than-expected inflation figures had little impact on the rate futures market because local investors are focused on signals from the government that inflation is becoming a more serious concern, according to Joao Junior, a fixed-income trader at Icap Brasil DTVM in Rio de Janeiro.

“The interest rate isn’t fixed. If you have more worrying inflation, it can move, but this is up to the central bank to decide,” Mantega said in an interview from Moscow Feb. 15. “The government will do what it takes to keep inflation under control.”

Real’s Gain

Mantega also said the government won’t allow the currency to appreciate too much. The real has strengthened 4.5 percent this year, the most among 25 emerging-market currencies tracked by Bloomberg.

The central bank sold $1.35 billion of reverse currency swap contracts on Feb. 15, the same day as Mantega’s comments. Policy makers swung in 2012 between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond 2 per U.S. dollar.

The real pared gains today amid growing speculation the central bank will lift borrowing costs this year, reducing the need to control inflation through currency appreciation, said Alfredo Barbutti, an economist at Liquidez DTVM in Sao Paulo.

“The market is betting on an interest-rate hike,” he said in a telephone interview. “If the central bank really does raise rates to contain inflation, as the market is now betting, maybe the government won’t need such a weak dollar.”

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