Brazil Swap Rates Rise on Rousseff Signal; Real Advances

Brazil’s shorter-term swap rates rose the most in a week after Correio Braziliense reported that President Dilma Rousseff won’t oppose an increase in borrowing costs as the central bank begins a two-day policy meeting.

Swap rates on the contract due in January 2014 climbed three basis points, or 0.03 percentage point, to 7.67 percent at the close in Sao Paulo. The real advanced 0.3 percent to 1.9642 per dollar.

Support from Rousseff “would be one less obstacle for a rate increase,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento SA in Sao Paulo, said in a telephone interview. “The central bank may change its statement, better qualifying its language about rates being unchanged for a prolonged period.”

Rousseff has given the central bank clearance to raise borrowing costs as needed, the Brasilia-based newspaper Correio Braziliense reported today without saying where it got the information. The central bank will hold the target lending rate at a record low 7.25 percent for a third straight meeting to support the economy, according to the median forecast of 53 economists surveyed by Bloomberg.

Phone calls and e-mail messages to the Presidential Palace and the Finance Ministry weren’t returned.

Inflation has exceeded the 4.5 percent midpoint of policy makers’ preferred range for more than two years. At its last three meetings, the central bank has said that keeping monetary conditions stable for a “sufficiently prolonged period” is the best way to contain inflation.

Slowing Growth

Growth in the world’s sixth-largest economy fell to 0.9 percent last year, the slowest pace since 2009, on declines in agriculture and industrial production, the national statistics agency said March 1. Price increases in mid-February exceeded economists’ forecasts for the eighth consecutive month, while annual inflation accelerated to 6.18 percent.

Brazil’s real gained along with most of the 25 biggest emerging-market currencies tracked by Bloomberg as Europe’s economy showed signs of a rebound and traders wagered a signal of future monetary tightening would boost demand for Brazilian assets.

“With the possibility of a rate hike, the trend is for the dollar to fall, though that should be limited to the 1.95 to 2 per dollar range,” Santos said. “Europe had better numbers, which excited the markets.”

U.K. services unexpectedly accelerated last month as demand strengthened, indicating the economy may stave off a recession this quarter. A gauge of activity increased to 51.8 from 51.5 in January, Markit Economics and the Chartered Institute of Purchasing and Supply said today in London.

Federal Reserve Vice Chairman Janet Yellen said yesterday the U.S. central bank should continue with its $85-billion monthly bond purchases. Her remarks echoed Chairman Ben S. Bernanke’s comment last week that the benefits of the Fed’s low interest rates and $3.1 trillion balance sheet outweigh any risk of financial instability.

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