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Brazil Swap Rates Drop Second Day After Rate Move; Real Advances

Brazil’s short-term swap rates headed for the biggest weekly drop in 11 months after policy makers raised borrowing costs less than some analysts had forecast and signaled that increases this year may be limited.

Swap rates on the contract due in January 2014 fell four basis points, or 0.04 percentage point, to 7.8 percent at 1:18 p.m. in Sao Paulo, pushing the five-day decrease to 37 basis points, the most since the period ended May 18. The real advanced 0.5 percent to 2.0085 per dollar, paring its loss since April 12 to 1.9 percent.

The statement accompanying policy makers’ decision to raise the benchmark interest rate 25 basis points this week noted that “external uncertainties” required “that monetary policy be managed with caution.” Speculation that signaled smaller borrowing-cost increases this year sent swap rates lower even as prices as measured by the IPCA-15 index jumped 0.51 percent in the month through mid-April, more than forecast by all except three of 38 economists surveyed by Bloomberg.

“The monetary policy committee showed a high tolerance for inflation, and this shouldn’t change because of the IPCA-15,” Tony Volpon, the head of research for the Americas at Nomura Holdings Inc., said by phone from New York.

The central bank’s board this week voted 6 to 2 to raise the target lending rate to 7.50 percent from a record low 7.25 percent. A survey by Bloomberg showed that 18 of 58 analysts forecast an increase of 50 basis points.

Policy makers said “the high level” and “resilience” of inflation required a response, according to the board’s statement posted on the bank’s website.

Inflation Rate

Consumer prices rose at an annual rate of 6.59 percent in March, exceeding the upper limit of the central bank’s preferred range for the first time since November 2011. The target is 4.5 percent, plus or minus 2 percentage points.

“The interpretation is that the central bank does not have the commitment to fight inflation,” which warrants “the high inflation premium on the local bond curve,” Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group Inc. in New York, wrote in an e-mailed report today.

The real, the second-best performer among 16 major currencies tracked by Bloomberg today, rebounded from a 0.9 percent drop yesterday as investors speculated $3.2 billion in international bond sales by Brazilian companies this month will bring more dollars into the country.

“The market is working with the expectation of inflows because of these borrowings abroad by Brazilian companies,” Sidnei Nehme, a director at NGO Corretora, said by phone from Sao Paulo.

The real has traded weaker than 2 per dollar every day this week and tumbled 1.6 percent on April 15. It’s heading for the worst weekly loss since the period ended March 15.

Policy makers have 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.

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