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Brazil Swap Rates Rise on Concern Weak Real Will Stoke Inflation

May 10 (Bloomberg) -- Brazil’s swap rates climbed on speculation a weakening real will stoke inflation and prompt policy makers to step up the pace of borrowing-cost increases.

Swap rates on the contract due in January 2015 rose 11 basis points, or 0.11 percentage point, to 8.35 percent, the highest level since April 25 on a closing basis. They increased eight basis points this week. The real fell 0.4 percent to 2.0204 per dollar, extending its decline over the past 12 months to 3.3 percent. The currency has fallen 0.6 percent since May 3.

“There is a problem with the real’s depreciation causing risks of accelerating inflation,” Alfredo Barbutti, an economist at BGC Liquidez in Sao Paulo, said in a telephone interview. “There are risks even though the government says the price increases are under control.”

The national statistics agency reported May 8 that consumer prices rose 6.49 percent in April from a year earlier, surpassing the 6.42 percent median forecast of 30 economists surveyed by Bloomberg. Annual inflation accelerated to 6.59 percent in March, above the central bank’s target range of 2.5 percent to 6.5 percent.

The bank’s board voted 6 to 2 last month to increase the target lending rate to 7.50 percent from a record low 7.25 percent, saying in its statement that the “resilience of inflation” required action.

The real traded weaker than 2 per dollar for a second straight week. The central bank has swung this year between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by reining in gains.

Brazil reported a trade deficit of $994 million in April, compared to a surplus of $164 million in March, according to a report from the Development, Industry and Trade Ministry in Brasilia on May 2.

“Brazil’s trade balance has deteriorated and there is a lot of people saying the real is not valued properly,” Barbutti said.

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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