Brazil Swap Rates Rise Before Central Bank Minutes; Real Gains

Brazil swap rates climbed to an eight-month high on speculation central bank minutes due tomorrow will signal plans for an increase in borrowing costs to contain accelerating inflation.

Swap rates due in January 2016 rose five basis points, or 0.05 percentage point, to 9.11 percent at 1:48 p.m. in Sao Paulo, the highest level on a closing basis since July 5. The real appreciated 0.2 percent to 1.9615 per dollar.

Inflation has remained “very resilient” since the second half of 2012, central bank President Alexandre Tombini said yesterday in Warsaw, four days after the government eliminated taxes on staples to rein in consumer prices. Annual inflation accelerated to a 14-month high of 6.31 percent in February, the government reported last week.

“The central bank’s vision on inflation, which was more favorable, has changed,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a phone interview. “If that is confirmed in the minutes, the market is inclined to bet on a rate hike as soon as April.”

Policy makers dropped a pledge made in October to keep borrowing costs unchanged for a “prolonged period” from their statement on March 6 as they left the target lending rate at a record low 7.25 percent.

Economists cut their 2014 growth forecasts in a survey published March 11. Gross domestic product will expand 3.50 percent next year, according to the median estimate of about 100 analysts surveyed by the central bank, down from the prior projection of 3.65 percent.

Currency Intervention

The real fell that day from a 10-month high of 1.9442 as the central bank sold $1 billion of reverse foreign-exchange swaps to weaken the currency. It rallied on March 8 as traders speculated that policy makers would let the currency appreciate after the government reported accelerated inflation.

“The real should respect the ceiling of 1.95 per dollar since there is not much space for further gains given the central bank’s vigilance,” Reginaldo Galhardo, a foreign-exchange manager at Treviso Corretora in Sao Paulo, said in a phone interview.

The central bank has swung between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by preventing excessive gains.

Brazil pushed the real down 9 percent in 2012 and 11 percent in the prior year as Finance Minister Guido Mantega said developed economies were debasing currencies such as the dollar while driving up those of emerging nations.

The central bank reported today $2.9 billion in net currency outflows this year through March 8, up from $2.1 billion a week earlier.

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