• Traders see sign interest rate increases could be resumed
  • Swap rates jump across the board after central bank comment

Brazil’s central bank said it will do what’s necessary to meet its 4.5 percent inflation target in 2017, after abandoning a plan to reach that goal next year.

“The central bank will adopt the necessary measures to meet the objectives of its target regime and bring inflation back to the 4.5 percent target in 2017,” according to a slide show presented by central bank director for economic policy Altamir Lopes.

Squeezed between the fastest inflation in 12 years and the deepest recession since 1990, the central bank has kept the benchmark interest rate unchanged in its past two meetings. Traders are betting policy makers will have to resume interest rate increases this month to offset the impact on prices of a weaker currency and a loose fiscal policy.

Before pausing, the central bank increased the Selic rate to 14.25 percent from 11 percent in September 2013. Still, inflation accelerated to 9.77 percent in the 12 months through mid-October as the government raised administered prices, such as electricity and fuel.

Swap rates maturing in January 2017 jumped 5 basis points to 15.4 percent at 10:41 a.m. local time as traders interpreted the comment as a sign policy makers are willing to raise rates again.

“They are sending a message they are willing to act and that their goal is 4.5 percent in 2017,” said Jose Francisco Goncalves, chief economist at Banco Fator. ”The market reacted in a reasonable way” given there were expectations the central bank would push the target as far as 2018, he said.

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