Brazil Swap Rates Climb on Petrobras Price Outlook; Real Rises

Brazil’s swap rates rose, reversing an earlier drop, as the state oil company signaled it would seek further price increases, spurring speculation that inflation will prompt the central bank to raise borrowing costs.

Swap rates due in January 2015 climbed three basis points, or 0.03 percentage point, to 8.02 percent at the close in Sao Paulo. They earlier fell six basis points after President Dilma Rousseff said the government plans to scrap federal taxes on food staples to control inflation. The real appreciated 0.5 percent to 1.9846 per dollar.

State-controlled Petroleo Brasileiro SA will continue to seek “convergence” with international fuel prices, Chief Executive Officer Graca Foster told analysts on a conference call today. Swap rates also rose as the IGP-DI index of producer, consumer and construction prices increased in January more than economists forecast.

“We had information coming from all sides, with the IGP-DI and Graca Foster pushing rates up, and Dilma pushing them down,” said Pedro Ferman, a fixed-income analyst at Maxima Asset Management in Rio de Janeiro. “The upshot of all this was the shorter-term rates rose.”

Petrobras, as the company is also known, said last week that it was raising gasoline prices at refineries by 6.6 percent and diesel by 5.4 percent.

The Getulio Vargas Foundation reported today that its IGP-DI index rose 0.31 percent last month after a 0.66 percent increase in December. The median forecast of 25 economists surveyed by Bloomberg was for a 0.26 percent advance.

Annual Inflation

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 rose 5.84 percent in December from a year earlier, quickening from the 5.53 percent annual pace in the prior month.

While Rousseff said inflation is “no way near” the ceiling of the central bank’s target range of 2.5 percent to 6.5 percent, the government is seeking to slow the pace of price increases.

“We are studying a total cut of federal taxes on the basic foods basket,” Rousseff said in an interview with local radio stations posted on the presidential palace’s website. “We will cut those taxes.”

Reducing taxes would help tame inflation, which the central policy makers sought to revive growth after the slowest two years of economic expansion in a decade.

Currency Gains

on Jan. 28 for the first time since July after the central bank intervened by selling $1.85 billion of foreign-exchange swaps as inflation accelerated.

Policy makers 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.

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