Brazil Swap Rates Increase on Inflation Concern; Real Declines

Brazil’s swap rates climbed on speculation higher crude costs will prompt the government to raise domestic fuel prices, stoking concern that policy makers will increase borrowing costs to tame inflation.

Swap rates due in January 2015 rose seven basis points, or 0.07 percentage point, to 8.09 percent at the close in Sao Paulo, the highest level since Oct. 4. The real depreciated 0.3 percent to 1.9911 per dollar.

The government will “closely” monitor the price of oil so it doesn’t get too distant from domestic gasoline prices and cause losses for state-controlled Petroleo Brasileiro SA, Finance Minister Guido Mantega said yesterday. Petrobras was cleared to raise gas prices at refineries by 6.6 percent and diesel by 5.4 percent, according to a filing last week.

“Mantega talking about oil prices is more fuel on the fire” for inflation, said Joao Junior, a fixed-income trader at Icap Brasil DTVM, in a phone interview from Sao Paulo.

Crude oil has risen 12 percent in the past two months to $96.62 today in New York.

Inflation is getting worse in the “short term,” the central bank said in the minutes of its Jan. 15-16 meeting. Policy makers held the target lending rate at a record low 7.25 percent for a second meeting as they sought to revive growth after the slowest two years of economic expansion in a decade.

Brazil will be able to count as much as 20 billion reais of tax cuts as part of its primary surplus, allowing the government to save less and still legally meet its saving target, O Estado de S. Paulo reported, without saying where it got the information. The Finance Ministry’s press office didn’t respond to a request for comment.

Grain Surplus

Conab, as the government’s crop forecasting agency is known, informed Chief of Staff Gleisi Hoffmann in a meeting last week that there isn’t enough grain in storage to stem inflation by selling grain inventories, a move the government had been considering, Valor Economico reported, without saying how it obtained the information.

President Dilma Rousseff said yesterday the government plans to scrap federal taxes on food staples to control inflation.

“The initiatives of the government to try to use different means to influence inflation in the short term are creating exhaustion in the market,” said Vladimir Caramaschi, the chief strategist for Credit Agricole do Brasil, in a phone interview from Sao Paulo. “The impact is one-off and inflation returns afterwards. This shows the trap the government stepped into when it transformed the interest rates into a political flag.”

Vehicle Production

Vehicle production rose 8 percent in January from the month before to 279,332, while sales fell 13 percent from the December to 311,453, according to the National Vehicle Manufacturer Association.

Brazil’s industrial capacity utilization fell to 80.9 percent in December, from 81.4 percent the month before, according to the National Confederation of Industry in Brasilia.

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.

The central bank last week renewed $1.85 billion of foreign-exchange swaps set to expire Feb. 1, refraining from buying dollars to settle the contracts, and offered dollar-denominated credit lines on Jan. 30. The government also exempted foreigners from a tax on real-estate funds on Jan. 31 to attract overseas investments.

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