Brazilian Swap Rates Rise Most in Month After Inflation Report

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Brazil’s swap rates climbed the most in a month after inflation accelerated further beyond the ceiling of the official target, adding to speculation that the central bank will raise borrowing costs by another half-percentage point later this month.

The government said Friday that consumer prices rose 8.22 percent in the 12 months through mid-April, faster than the official target range of 2.5 percent to 6.5 percent. The report came three days after central bank President Alexandre Tombini said that the inflation outlook hasn’t improved enough to allow policy makers to stop being vigilant.

“Inflation appears not to be slowing the way the central bank would like to see,” Paulo Nepomuceno, a fixed-income strategist at brokerage Coinvalores CCVM in Sao Paulo, said in a telephone interview. “It will probably have to raise rates 50 basis points again at the next meeting.”

Swap rates on the contract maturing in January 2017 increased 15 basis points, or 0.15 percentage point, to 13.17 percent at the end of trade in Sao Paulo, and they were up the same amount for the week. The real dropped 0.7 percent to 3.0408 per dollar, paring its gain since April 10 to 1.1 percent, as concern the Federal Reserve will raise interest rates sooner than expected sank emerging-market demand.

Target Rate

Brazil’s benchmark lending rate is at a six-year high of 12.75 percent after the central bank raised it at four consecutive policy meetings. Traders project that policy makers will lift the so-called Selic by a half-percentage point April 29, matching the three previous increases.

The real declined Friday as a U.S. government report indicated that consumer prices excluding food and fuel climbed at the fastest annual pace since October. As inflation shows signs of moving toward the Fed’s goal, policy makers are considering when to begin raising interest rates for the first time since 2006.

The local currency was still up 5.1 percent this month as reduced tension between President Dilma Rousseff’s administration and lawmakers stoked speculation that the government will succeed in trimming budget deficits.

The central bank extended the maturity of currency swap contracts worth $515.7 million Friday. The sale of the swaps, which supported the real and limited import price increases, was halted at the end of March.

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