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Brazil Swap Rates Rise as Inflation Exceeds Forecast; Real Falls

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March 19 (Bloomberg) -- Brazil’s swap rates climbed as faster-than-forecast inflation added to speculation that the central bank will keep raising borrowing costs.

Swap rates on contracts maturing in January 2015 rose eight basis points, or 0.08 percentage point, to 11.25 percent. The real fell 0.7 percent to 2.3498 per dollar, erasing a gain after more U.S. Fed officials projected that policy makers will raise borrowing costs next year.

The Getulio Vargas Foundation reported that Brazil’s producer, construction and consumer prices rose 1.41 percent in the 20 days starting Feb. 21, more than the 1.35 percent increase forecast by economists surveyed by Bloomberg. Central bank president Alexandre Tombini repeated yesterday that policy makers are acting to ensure inflation will slow to target.

“It’s hard to say at this moment when the central bank will stop raising rates,” Solange Srour, the chief economist at ARX Investimentos, said by phone from Rio de Janeiro.

Brazil has lifted the target lending rate by 350 basis points over eight consecutive meetings since April 2013 to 10.75 percent from a record low 7.25 percent.

Annual inflation accelerated to 5.68 percent in February from 5.59 percent in the prior month, compared with the official target of 4.5 percent, plus or minus 2 percentage points.

The currency dropped as the Fed’s new forecast showed more officials predicting the U.S. benchmark rate, now close to zero, will be raised at least to 1 percent at the end of 2015, making Brazil’s higher-yielding assets less attractive.

Rating Concern

The real has fallen 15 percent in the past year on concern that a widening budget deficit, rising gross debt and sluggish growth will lead to a credit rating downgrade. The drop is the biggest among major currencies tracked by Bloomberg.

Brazil posted a foreign-exchange inflow of $3 billion this month through March 14, the central bank reported. The year-to-date inflow is $2.8 billion.

To support the real and limit import price increases, Brazil sold $198 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 $492.6 million.

To contact the reporter on this story: Filipe Pacheco in Sao Paulo at fpacheco4@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Dennis Fitzgerald, Richard Richtmyer

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