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Brazil Swap Rates Rise as Inflation Accelerates; Real Advances

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April 9 (Bloomberg) -- Brazil’s shorter-term swap rates climbed after an index of wholesale, construction and consumer prices rose more than forecast, deepening speculation the central bank will raise borrowing costs to curb inflation.

Swap rates due in January 2014 increased seven basis points, or 0.07 percentage point, to 7.88 percent, the highest level since March 13. The real rose 0.5 percent to 1.9812 per dollar.

The Getulio Vargas Foundation said today that its IGP-DI index climbed 0.31 percent last month, higher than the 0.20 percent median forecast in a Bloomberg survey of economists. Tomorrow’s report from the national statistics agency is projected by economists to show that the country’s benchmark consumer price index rose 6.62 percent in March from a year earlier, exceeding the 6.50 percent upper limit of the central bank’s target range for the first time since 2011.

“Higher IGP-DI inflation data today probably mean quickening inflation tomorrow and can feed the idea that” policy makers will raise rates as early as this month, Newton Rosa, the chief economist at Sul America Investimentos in Sao Paulo, said in a telephone interview.

Longer-term swap rates fell earlier a day after central bank President Alexandre Tombini said in Porto Alegre, Brazil, that the bank has acted with caution as prospects for international growth remain dim.

“Tombini is suggesting that perhaps the rate-hiking cycle does not need to last for very long to contain inflation,” Rosa said.

Policy Minutes

Minutes of the central bank’s March 5-6 meeting indicated that an increase in the benchmark lending rate from a record low 7.25 percent wasn’t imminent as policy makers said “a cautious management of monetary policy” was needed. Board members are next scheduled to set rates on April 16-17.

The real rose today as China’s inflation slowed more than economists forecast, damping speculation that Brazil’s biggest trading partner will raise borrowing costs and limit demand for the South American nation’s exports.

The currency closed on April 5 at a level stronger than 2 per dollar for the first time since March 20 after Finance Minister Guido Mantega said the government was studying cuts in taxes on profits earned by Brazilian companies abroad for products including ethanol.

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 reining in gains.

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net; Josue Leonel in Sao Paulo at jleonel@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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