Brazil Swap Rates Rise on Central Bank Signal: Sao Paulo Mover

Brazil’s swap rates climbed the most in two weeks after the central bank signaled it’s prepared to increase borrowing costs from a record low to curb inflation.

Swap rates due in January 2014 rose 12 basis points, or

0.12 percentage point, to 7.79 percent at 3:44 p.m. in Sao Paulo. The real gained 0.4 percent to 1.9624 per dollar.

“The central bank is leaving the door open to a rate increase at the next meeting in case inflation surprises on the upside,” Luciano Rostagno, the chief strategist at WestLB do Brasil SA in Sao Paulo, said in a telephone interview.

Policy makers removed from their statement a pledge to keep the target lending rate at a record low for a prolonged period. Instead, the board said it has been assessing the outlook for inflation and “will monitor the evolution of the macroeconomic scenario until its next meeting.” The benchmark Selic stayed at

7.25 percent for a third time.

“The central bank signaled a possibility of a rate hike in the next two meetings,” Italo Abucater, the head of currency trading at ICAP Brasil, said in a phone interview from Sao Paulo. “Higher rates will attract more flows, and with no panic going on in the economy abroad, that means the real is going to rise to 1.95 per dollar.”

The real gained after a U.S. report showed the number of Americans filing for unemployment benefits fell last week, buoying the prospects for the world’s largest economy and encouraging demand for emerging-market assets.

Currency Gain

Brazil’s currency has rallied 4.5 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.

Annual inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for more than two years, accelerating in January to 6.15 percent, still under policy makers’ 6.5 percent ceiling. Central bank president Alexandre Tombini said that month in Davos, Switzerland, that inflation is “resilient in the short run.”

Consumer prices will increase 5.70 percent this year, according to the median forecast of about 100 economists in a central bank survey published March 4.

“The central bank said that the rate cycle will depend on inflation,” Marcelo Fonseca, an economist at M. Safra in Sao Paulo, said in a telephone interview. “The inflation scenario is bad. The central bank gained some flexibility with this statement and cannot avoid raising rates in April.”

Target Rate

The central bank had reduced the target rate by 5.25 percentage points from August 2011 to October 2012, when it introduced the pledge to keep monetary policy on hold for a “sufficiently prolonged period,” which was removed yesterday.

“Sufficiently long period, no more,” Bradesco BBI economists Denis Blum, Roman Goossens and Dalton Gardimam said in an e-mailed report today. “Now rates can go up at any time. We maintain our call of the Selic rate rising to 8 percent by year-end 2013.”

The second-biggest emerging economy expanded 0.9 percent in 2012, its slowest pace in three years, the national statistics agency said March 1. The government predicts growth will rebound to at least 3 percent this year as the measures it took in 2011 and 2012 start to show effect, Finance Minister Guido Mantega told reporters March 1.

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