Brazil Swap Rates Rise as Inflation Accelerates; Real Advances

Brazil’s swap rates climbed to a six-month high as a report showed annual inflation accelerated in February, fueling speculation the central bank will lift borrowing costs this year.

The real rallied to its strongest level since May on speculation the central bank will let the currency appreciate to contain inflation. The government’s IPCA index of consumer prices climbed 6.31 percent in February from a year earlier, the highest annual rate in 14 months. The median forecast of economists surveyed by Bloomberg was for a 6.20 percent pace.

“IPCA has been surprising the market, and it shows that there’s a significant inflation risk,” Roberto Padovani, the chief economist at Votorantim CTVM in Sao Paulo, said in an telephone interview. “The increase may prompt the central bank to raise rates in April.”

Swap rates on the contract due in January 2014 increased 17 basis points, or 0.17 percentage point, to 7.96 percent at close in Sao Paulo, the highest level since Aug. 24. They were up 34 basis points this week. The real rose 0.7 percent to 1.9442 per dollar, the strongest since May 8. The currency extended its gain since March 1 to 1.8 percent, the most in five weeks.

Policy makers dropped a pledge to keep borrowing costs unchanged for a “prolonged period” from their statement accompanying the decision this week to leave the target lending rate at a record low 7.25 percent.

Currency Rally

The real has rallied 5.5 percent against the dollar this year, the most among 25 emerging-market counterparts tracked by Bloomberg. The real advanced to a level stronger than 2 per dollar on Jan. 28 for the first time since July.

The central bank has swung between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by preventive excessive gains.

“The last central bank intervention happened around 1.95 per dollar, close to current levels, but rising inflation concerns suggest it may not materialize at the same levels,” Eduardo Suarez, a Latin America currency strategist at Bank of Nova Scotia in Toronto, said today in an e-mailed report.

Annual inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for more than two years. Consumer prices will increase 5.70 percent in 2013, according to the median forecast of about 100 economists in a central bank survey published March 4.

Inflation Momentum

“There is no denying that inflation continues with surprisingly strong momentum,” Tony Volpon, the head of research for the Americas at Nomura Holdings Inc. in New York, said in an e-mailed research report.

Policy makers said in their statement March 6 that they have been assessing the outlook for inflation and “will monitor the evolution of the macroeconomic scenario” until their next meeting.

Deputy Finance Minister Nelson Barbosa told reporters in Brasilia today that inflation is under control and headed for the midpoint of target range “in an adequate period.” He said inflation will slow gradually throughout the year as commodity prices are passed on to the consumer.

Latin America’s biggest economy expanded 0.9 percent in 2012, its slowest pace in three years, the national statistics agency reported March 1. The government predicts growth will rebound to at least 3 percent this year as the stimulus measures it took in 2011 and 2012 start to show effect, Finance Minister Guido Mantega told reporters that day.

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