Brazil Swap Rates Surge on Mantega’s Pledge to Tackle Inflation

Brazil’s swap rates climbed as Finance Minister Guido Mantega said the government will do whatever it takes to fight inflation and signaled an interest rate increase is an option, boosting bets policy makers will raise borrowing costs to control price gains.

Swap rates due in January 2014 rose 23 basis points, or 0.23 percentage point, to 7.62 percent, the biggest increase on a closing basis since May 24. The real fell 0.5 percent to 1.9688 per dollar, paring its weekly gain to 0.2 percent. It advanced as much as 0.4 percent before the central bank announced reverse currency swaps to limit its advance.

Brazil’s inflation, which reached a one-year high of 6.15 percent in January, has exceeded the 4.5 percent mid-point of policy makers’ target for more than two years. While the central bank has kept its benchmark interest rate at a record-low 7.25 percent since October in an effort to revive economic growth, Mantega’s comments signal officials are becoming less tolerant of inflation, according to Newton Rosa, the chief economist at SulAmerica Investimentos in Sao Paulo.

“This is a sign that the main weapon to control inflation will be interest rates,” Rosa said in a phone interview. “Inflation concerns the government. The swap rates market is reflecting those comments from Mantega.”

Bond investors see inflation averaging 5.27 percent between now and 2015, down from 5.33 percent yesterday, according to the so-called breakeven rate that measures the difference between fixed-rate and inflation-linked bond yields.

Mantega Interview

“The interest rate isn’t fixed. If you have more worrying inflation, it can move, but this is up to the central bank to decide,” Mantega said in an interview from Moscow today. “The government will do what it takes to keep inflation under control”

Mantega also said the government won’t allow the currency to overappreciate. The real has strengthened 4.2 percent this year, the most among 25 emerging-market currencies tracked by Bloomberg.

The central bank sold $1.35 billion of reverse currency swap contracts today. 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 U.S. dollar.

The real fell from a nine-month high on Feb. 8 after the central bank intervened to stem gains triggered by Mantega, who signaled at the time that the government would allow the currency to rise another 5 percent.

The currency slid 9 percent in 2012 and 11 percent in the prior year, adding to the inflation pickup by making imports more expensive.

The central bank has lowered benchmark borrowing costs by 5.25 percentage points since August 2011 in the most aggressive cuts among Group of 20 nations.

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