Brazil Swap Rates Rise Before Central Bank Decision; Real Drops

Brazil’s swap rates climbed as an increase in the price of diesel spurred speculation that policy makers meeting today will signal plans to raise borrowing costs to control inflation.

Swap rates due in January 2015 rose two basis points, or 0.02 percentage point, to 8.35 percent. The real fell for the first time in three days, depreciating 0.3 percent to 1.9704 per dollar.

“This diesel increase on the day of the Copom meeting brings more pressure for the central bank in terms of inflation,” Luciano Rostagno, a strategist at Banco WestLB do Brasil in Sao Paulo, said in a phone interview. “It increases the chances the central bank will alter its statement to signal an increase in the Selic in April.”

Annual inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for more than two years. An increase of 5 percent in diesel prices at refineries is effective today, according to a regulatory filing by Petroleo Brasileiro SA, the state-run oil company.

The monetary policy committee, known as Copom, will hold the Selic target lending rate today at a record low 7.25 percent, according to the median forecast of 59 economists surveyed by Bloomberg.

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.

Vehicle Sales

Some swap-rate contracts dropped after the National Vehicle Manufacturers Association said Brazil’s vehicle sales fell 25 percent in February to 235,109 from a month earlier.

The real fell on concern the central bank may intervene to stem its advance, according to Eduardo Suarez, a Latin America foreign-exchange strategist at Bank of Nova Scotia.

Brazil’s currency has rallied 4.1 percent against the dollar this year, the most among 25 emerging-market counterparts tracked by Bloomberg. The real rose to a level stronger than 2 per dollar on Jan. 28 for the first time since July after the central bank intervened as inflation accelerated.

“We see support at 1.96, followed by 1.95,” Suarez said on the dollar versus the real in an e-mailed research report. Support is a level where orders to buy are clustered.

Brazil pushed the real down 9 percent in 2012 and 11 percent in the prior year as Finance Minister Guido Mantega said developed economies were debasing currencies such as the dollar while driving up those of emerging nations.

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