Brazil Swap Rates Fall After Inflation Report; Currency Gains

Brazil’s swap rates fell for a third day after a report showed a gauge of wholesale, consumer and construction prices rose less than forecast, reducing speculation the central bank will increase borrowing costs.

Swap rates due in January 2015 dropped five basis points, or 0.05 percentage point, to 8.40 percent. They rose on Feb. 22 to a six-month high of 8.51 percent. The real appreciated 0.5 percent to 1.9728 per dollar.

Brazil has succeeded in reducing swings in the real after letting the currency fall 19 percent over two years to protect local manufacturers, Finance Minister Guido Mantega said in an interview yesterday at Bloomberg’s headquarters in New York. Now that the real is hovering at about 2 per dollar, Brazil is abandoning policies to depress the currency, he said.

“Mantega seems to be comfortable with the exchange rate at its current level,” Jose Carlos Amado, a currency trader at Renascenca DTVM in Sao Paulo, said in a phone interview.

The real has gained 0.9 percent this month, the most among 25 emerging-market currencies after South Africa’s rand.

The currency rallied to a level stronger than 2 per U.S. dollar on Jan. 28 for the first time since July after the central bank intervened as inflation accelerated.

Central bank President Alexandre Tombini said on Feb. 25 at a New York conference that Brazil has learned to operate in a currency war environment. A more stable real this year will help slow inflation, Tombini said.

Inflation Report

The IGP-M price index rose 0.29 percent this month, the Getulio Vargas Foundation reported today. The median forecast of economists surveyed by Bloomberg was for the gauge to match January’s 0.34 percent increase. The index, which is made up of 60 percent producer prices, 30 percent consumer prices and 10 percent construction costs, rose 8.29 percent in February from a year earlier.

“With these positive signs for inflation, the chance of a rate hike practically does not exist,” Andre Perfeito, the chief economist at Gradual Investimentos in Sao Paulo, said in a phone interview.’’

The central bank will decide next week whether to hold the target rate at a record low 7.25 percent for a third meeting to support the economy even as consumer-price inflation has exceeded the 4.5 percent midpoint of its target range for more than two years.