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Brazil Swap Rates Rise on Inflation Outlook; Real Little Changed

Brazil swap rates rose as economists lifted forecasts for next year’s inflation, fueling bets that the central bank will extend borrowing-cost increases.

Swap rates due January 2016 climbed 13 basis points, or 0.13 percentage point, to 11.85 percent today in Sao Paulo. The real was little changed at 2.3433 per dollar.

Inflation will accelerate to 6.01 percent at the end of this year and end 2015 at 5.6 percent, up from a forecast of 5.5 percent a week ago, according to the median estimate of about 100 economists in a central bank survey published today. Brazil raised benchmark borrowing costs to 10.5 percent this month after increasing interest rates the most among major central banks last year as inflation exceeded the midpoint of policy makers’ target for a third straight year.

“The higher inflation forecasts in the central bank survey even after the central bank maintained the rhythm of rate hikes came as a surprise,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil, said in a telephone interview from Sao Paulo.

Policy makers lifted the target lending rate on Jan. 15 by a half-percentage point for a sixth straight meeting. The decision came after a government report showed that consumer prices rose 5.91 percent in 2013 even as central bank President Alexandre Tombini said in October that inflation would be less than the prior year’s 5.84 percent.

President Dilma Rousseff said Brazil “is making a big effort to make inflation converge” to the 4.5 percent midpoint of the central bank’s target range, according to an interview with Minas Gerais radio stations.

Credit Ratings

The real has declined 7.4 percent in the past three months on concern fiscal deterioration under Rousseff’s administration will lead to a lower credit rating and amid speculation that the tapering of Federal Reserve stimulus will undermine demand for Brazil’s assets.

Standard & Poor’s and Moody’s Investors Service lowered their outlooks last year on Brazil’s credit rating, which both have at two levels above junk. The government’s budget deficit as a percentage of gross domestic product narrowed to 3 percent in November from 3.4 percent in the prior month, which was the widest since 2009.

To support the currency and limit import price increases, Brazil sold $198 million of foreign-exchange swaps today under a program announced Dec. 18 that offers $200 million each trading day until at least June 30.

The central bank also sold $1.2 billion in the third auction since last week to roll over swaps that mature Feb. 3. The bank has rolled over $3.7 billion of the $11 billion that were to mature next month, after it extended maturities in offerings last month on all of the $9.9 billion of contracts due Jan. 2.

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