Brazil Swap Rates Rise as Retail Sales Beat Forecast

Brazilian swap rates rose as retail sales advanced more than analysts forecast, backing speculation that policy makers will refrain from cutting the Selic target interest rate at their two-day policy meeting that begins today.

Swap rates on the contract due in January 2015 climbed two basis points, or 0.02 percentage point, to 7.71 percent at the close in Sao Paulo, the first increase since Jan. 8. The real depreciated 0.2 percent to 2.0358 per dollar.

Retail sales rose for a sixth straight month in November, climbing 0.3 percent, more than the 0.2 percent median forecast of economists surveyed by Bloomberg. Swap rates also increased after O Estado de S. Paulo reported without saying where it obtained the information that Brazil may raise diesel prices as much as 5 percent, fanning concern that inflation will quicken. The Finance Ministry declined to comment on the report.

“Swap rates adjusted to this retail sales number,” Carlos Kawall, the chief economist at Banco J. Safra SA in Sao Paulo, said by phone. “In this context of high inflation and weak activity, keeping the Selic unchanged for a long period is the most probable scenario.”

Policy makers have left the benchmark rate unchanged at a record low 7.25 percent since October. The central bank will hold borrowing costs steady tomorrow, according to all of the 56 economists surveyed by Bloomberg.

Annual inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for 28 consecutive months. The IPCA index of consumer prices increased 5.84 percent in December from a year earlier after rising 5.53 percent in the prior month, the national statistics agency reported last week.

Tax Breaks

President Dilma Rousseff’s government has granted tax breaks for goods including furniture, appliances and automobiles to prop up demand and spur faltering growth in the world’s second-largest emerging-market economy.

Brazil’s central bank estimates the economy grew 1 percent last year, its worst performance since 2009, while economists surveyed by the bank forecast 3.2 percent expansion this year. The economy grew 2.7 percent in 2011 and 7.5 percent in 2010.

The real declined today along with most of the 16 major currencies as concern that U.S. budget wrangling will weaken growth in the world’s largest economy damped demand for emerging-market assets.

President Barack Obama said yesterday he won’t bargain with Republicans over raising the government’s debt ceiling and called for separate discussions on spending cuts to narrow the federal budget deficit.

‘Remain Attentive’

“Investors are digesting the discussions in the U.S. about the debt ceiling,” Joao Paulo de Gracia Correa, the head of currency trading at Correparti Corretora, said by telephone from Curitiba. “The markets should remain attentive to this theme until the end of the negotiations.”

The real has gained 1.6 percent since Dec. 20, when Carlos Hamilton, the central bank’s director for economic policy, said officials consider an exchange rate of 2.05 as more “adequate” when creating economic forecasts than 2.10.

The central bank sold currency swaps in November and December to stem the real’s declines. From August through October, the bank sold reverse currency swaps to keep the real weaker than 2 per dollar.

Before it's here, it's on the Bloomberg Terminal.