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Brazilian Swap Rates Increase With Currency as Economy Expands

Brazil’s swap rates climbed as a report showing the fastest economic growth in five years added to speculation that policy makers will extend borrowing cost increases to curb inflation.

Swap rates on contracts due in January 2017 rose five basis points, or 0.05 percentage point, to 12.55 percent today in Sao Paulo, and were unchanged this week. The real appreciated 0.7 percent to 2.3467 per U.S. dollar, paring its decline since March 7 to 0.3 percent.

The central bank reported today that the seasonally adjusted economic activity index, a proxy for gross domestic product, advanced 1.26 percent in January from a month earlier after contracting 1.4 percent in the prior month. Policy makers lifted the target lending rate by a quarter-percentage point to 10.75 percent at their meeting last month, half the pace of the previous six increases.

“Activity was much stronger than expected,” Vinicius de Oliveira Botelho, an economist at Instituto Brasileiro de Economia, said in a phone interview from Rio de Janeiro. “That shows there is space to keep hiking rates. The central bank will likely pause after the next hike.”

Consumer prices rose 5.68 percent in February after a 5.59 percent increase in the prior month, the national statistics agency reported March 12. Inflation has remained above the 4.5 percent midpoint of the central bank’s target range for more than three years, undermining purchasing power.

The real has fallen 2.8 percent in the past six months on concern a widening government budget deficit, rising gross debt and sluggish economic growth will lead to a lower credit rating.

To support the currency and limit import price increases, the central bank sold $198.1 million of foreign-exchange swaps today under a program announced in December. The central bank also held an auction to extend maturities on swaps due in April, rolling over $492.3 million.

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