Real Rises to Two-Month High as Bank Seen Allowing Rally

Brazil’s real advanced to a two-month high on speculation the central bank will allow it to gain further to ease inflation.

The currency appreciated 0.2 percent to 2.0276 per U.S. dollar at the close in Sao Paulo, the strongest level since Oct. 26. Swap rates due in January 2015 decreased four basis points, or 0.04 percentage point, to 7.70 percent.

About 100 economists in a weekly survey published today raised their median forecast for the benchmark IPCA index of consumer prices by the end of 2013 to 5.49 percent from 5.47 percent the week before. The central bank strengthened the real in November by selling currency swaps after it reached a three-year low.

“With the depreciation of the real, a yellow light has come on,” said Francisco Carvalho, the head of currency at Liquidez DTVM. “Inflation will continue to cause more concern in the short term.”

The annual rate of consumer price increases as measured by the IPCA gauge has exceeded the 4.5 percent midpoint of the central bank’s target range for 27 consecutive months. Inflation unexpectedly accelerated to 5.53 percent in November from 5.45 percent the month before, the statistics agency reported Dec. 7. The government will release figures for last month on Jan. 10.

The IGP-DI inflation index, composed of 60 percent wholesale prices, 30 percent consumer prices and 10 percent construction costs, rose 0.66 percent in December, the Getulio Vargas Foundation reported today. The median estimate of 23 economists surveyed by Bloomberg was for 0.65 percent increase.

GDP Outlook

Swap rates dropped as economists in the central bank survey lowered their projection for growth, spurring speculation that the central bank will keep borrowing costs at record lows. Gross domestic product will expand 3.26 percent this year, according to the median forecast, down from 3.30 percent growth projected in the prior week. It was the fourth time in five weeks economists cut their 2013 forecasts.

“The local swap rate curve should drop in reaction to the continuous downward revisions of GDP forecasts,” Octavio de Barros, an economist at Banco Bradesco SA, said in an e-mailed report today.

Policy makers left the target lending rate at a record low 7.25 percent in November after 10 consecutive reductions since August 2011 to support growth.

Swap rates also fell as Folha de S.Paulo reported today that President Dilma Rousseff asked power utilities to attend an emergency meeting Jan. 9 to discuss the risk that the country’s reservoirs might fall so low that energy rationing is needed. The newspaper cited unidentified government officials.

Rousseff Vacation

A presidential press officer who asked not to be identified in accord with policy said by phone from Brasilia that Rousseff is on vacation and there is no such meeting on her schedule.

The Ministry of Mines and Energy said in a statement today on its website that Minister Edison Lobao will hold a monthly meeting with government officials and regulators on Jan. 9. Utility representatives may also attend, according to the statement, which didn’t mention Rousseff.

“The risk of energy rationing is concerning the market,” said Felipe Brandao, an emerging-market analyst at ICAP Brasil. “If the problem grows, it could have an impact on economic activity, which could reduce inflation.”

Brazil’s central bank swung in 2012 between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond 2 per dollar.

The real has gained 2 percent since Dec. 20, when Carlos Hamilton, the central bank’s director for economic policy, said officials consider an exchange rate of 2.05 per dollar as more “adequate” when creating economic forecasts than 2.10.

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