Brazil Swap Rates Rise to Five-Month High; Real Little Changed

Brazil’s swap rates rose to a five-month high as a report showed consumer prices increased more than forecast, bolstering speculation that the central bank will raise borrowing costs this year.

Swap rates on the contract due in January 2014 climbed 16 basis points, or 0.16 percentage point, to 7.83 percent, the highest level on a closing basis since Sept. 19. They have risen 18 basis points since Feb. 15 in their sixth consecutive weekly increase. The real was little changed at 1.9727 per U.S. dollar, leaving it down 0.2 percent for the week.

The real has rallied 4 percent in 2013, the best performance among emerging-market counterparts, on speculation Brazil’s government will allow the currency to strengthen to curb inflation. Central bank president Alexandre Tombini said yesterday in Urbana, Illinois, that the government is less concerned about the “currency war” than it was previously.

“Investors are betting that the currency may be a tool to curb inflation, even if it’s not the main one,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA in Sao Paulo, said in a phone interview.

JPMorgan Chase & Co. analysts said in a research note published today that it forecasts the real will strengthen to 1.90 per dollar by the end of the second quarter, compared with a previous forecast of 2.03.

“As inflation remains at the top of economic concerns, we believe that at least in the short term the government should allow a stronger real,” the analysts wrote.

The central bank will start raising the target lending rate in May and lift the 7.25 percent benchmark by 1.25 percentage points to 8.50 percent by year-end, according to JPMorgan.

Mantega’s View

Finance Minister Guido Mantega said yesterday that the exchange rate can float and there is no need to take additional measures to intervene in the currency markets.

The real rallied to a level stronger than 2 per dollar on Jan. 28 for the first time since July after the central bank intervened in the currency market as inflation accelerated. Brazil pushed the real down 9 percent in 2012 and 11 percent in the prior year as Mantega said major economies were debasing currencies such as the dollar while driving up those of developing nations.

The IPCA-15 index of consumer prices rose 0.68 percent in the one month through mid-February after a 0.88 percent advance in the prior period, the national statistics agency reported today. The median forecast of 38 economists surveyed by Bloomberg was for a 0.62 percent increase.

‘Inflation Trajectory’

“The inflation trajectory warrants a tighter monetary policy,” Carlos Kawall, the chief economist at Banco J. Safra SA in Sao Paulo, said by phone. “There is a series of inflation figures coming in above forecasts.”

Inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for more than two years as President Dilma Rousseff’s administration extended tax breaks for consumer goods and pressured banks to lower lending rates.

Brazil’s current account deficit, the broadest measure of trade in goods and services, widened in January to $11.4 billion from $7.1 billion a year earlier, the central bank reported today. The gap was bigger than estimated by all except two of 22 analysts surveyed by Bloomberg, whose median estimate was for a deficit of $9.7 billion.

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