Brazil Swap Rates Drop as Retail Sales Decline; Real Advances

Brazil’s swap rates fell from a five-month high as retail sales unexpectedly declined in December, reducing speculation that the central bank will raise borrowing costs to curb inflation.

Central bank president Alexandre Tombini said today at an event in Brasilia that the monetary policy stance will be adjusted if required and there is no risk of inflation getting out of control.

“The economic recovery is still wrapped in uncertainty,” Roberto Padovani, an economist at Votorantim CTVM in Sao Paulo, said in a phone interview. “The central bank will have to wait for more numbers to evaluate the economy.”

Swap rates due in January 2015 dropped four basis points, or 0.04 percentage point, to 8.41 percent at 3:48 p.m. in Sao Paulo. The real appreciated 0.4 percent to 1.9559 per dollar.

The volume of retail sales declined 0.5 percent in December after increasing 0.3 percent in the prior month, the national statistics agency reported today. The median forecast of 31 economists surveyed by Bloomberg was for a 0.8 percent increase. A 0.2 percent advance was the most pessimistic projection.

Swap rates rose 16 basis points yesterday to their highest level since September after Finance Minister Guido Mantega said on Feb. 15 in an interview in Moscow that the government will do whatever it takes to contain inflation and signaled higher borrowing costs may be an option.

The annual rate of consumer price increases reached a one-year high of 6.15 percent in January and has exceeded the 4.5 percent midpoint of policy makers’ target range for more than two years.

Tombini View

“When necessary, if supported by the prospective scenario for inflation, the posture of the central bank in relation to monetary policy will be adequately adjusted,” Tombini said in Brasilia.

The Getulio Vargas Foundation reported today its IGP-M Index, mostly composed of producer prices, rose 0.34 percent from Jan. 21 through Feb. 10, less than the 0.36 percent median projection of economists surveyed by Bloomberg.

The central bank has reduced the target lending rate by 5.25 percentage points to 7.25 percent since August 2011 in the most aggressive cuts among Group of 20 nations.

Gross domestic product will expand 3.08 percent this year and 3.65 percent in 2014, according to the median forecast in a central bank survey of about 100 analysts published yesterday. That compares with last week’s growth projections of 3.09 percent and 3.80 percent. The analysts lowered their forecast for 2013 inflation for the first time since November, reducing it to 5.70 percent from 5.71 percent.

Mantega on Real

The real dropped on Feb. 15 as Mantega said that the government won’t allow the currency to appreciate too much and the central bank sold $1.35 billion of reverse currency swaps.

The central bank may step in again if it appreciates further, according to Italo Abucater, the head of foreign-exchange trading at ICAP do Brasil CTVM in Sao Paulo.

“The question is whether the central bank will intervene if the real hits 1.95 per dollar again,” Abucater said in a phone interview.

The currency rallied to a level stronger than 2 per dollar on Jan. 28 for the first time since July after the central bank renewed $1.85 billion of foreign-exchange swaps about to expire, refraining from buying dollars to settle the contracts. On Jan. 31, the government exempted foreigners from a tax on real-estate funds traded on the stock exchange, spurring speculation that inflows will help sustain the real.

The real has strengthened 4.9 percent this year, the most among 25 emerging-market currencies tracked by Bloomberg. It advanced 0.2 percent last week.

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