Brazilian Real Rises as Central Bank Intervenes to Stem Declines

Brazil’s real rose for the first time in seven days after the central bank announced an offering of foreign-exchange swaps to limit the currency’s decline.

The real climbed 0.3 percent to 2.0110 per dollar, the most in two weeks, after dropping 0.5 percent. The central bank sold all of the 20,000 currency swap contracts it offered for $995 million in its first intervention since it auctioned reverse currency swaps on March 11 to weaken the currency.

President Dilma Rousseff criticized policies that sacrifice growth at a summit in Durban, South Africa, spurring speculation policy makers will push back a projected increase in borrowing costs. The real pared its decline in March to 1.6 percent, still the biggest among major Latin America currencies.

“They don’t want the real to drop further due to inflation concern,” Eduardo Suarez, a Latin America foreign-exchange strategist at Bank of Nova Scotia, said in a phone interview from Toronto. “Rousseff said she does not agree with policies that hurt growth, so her bias would probably be to use the real to avoid rate hikes as much as possible.”

Rousseff told reporters today at a summit of the so-called BRIC nations in Durban, South Africa, that she doesn’t agree with anti-inflation policies that sacrifice growth.

“Killing the patient instead of curing the disease is a bit complicated,” she said. “Am I going to put an end to growth? That’s an outdated policy.” She later said on her blog that inflation control is a permanent objective.

Leaders from Brazil, Russia, India, China and South Africa approved at the annual summit a $100 billion fund to combat currency crises.

Fitch View

Fitch Ratings said in a report today that a “continued and more prolonged” slowdown in Brazil combined with an expansionary fiscal stance may hinder government debt reduction. The company rates Brazil at BBB, the second-lowest level of investment grade.

The real fell yesterday for a sixth day in the longest stretch of losses in 2013 as Deputy Finance Minister Nelson Barbosa told reporters in Brasilia that the currency’s volatility is too low to have an impact on inflation.

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 preventing excessive gains. The real closed at a 10-month high of 1.9442 per dollar on March 8 before the central bank intervened on March 11 to weaken it.

Central bank President Alexandre Tombini said last week that policy makers were ready to step into the foreign-exchange market to avoid excessive volatility.

Inflation Report

Swap rates dropped today as the Getulio Vargas Foundation reported that its IGP-M index of producer, construction and consumer prices climbed 0.21 percent from Feb. 21 to March 20. The median forecast of economists surveyed by Bloomberg was for the gauge to match the prior 0.29 percent increase.

“IGP-M was lower than expected,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA in Sao Paulo, said in a telephone interview.

Swap rates on contracts due in January 2015 dropped seven basis points, or 0.07 percentage point, to 8.45 percent today. They have risen 74 basis points in the first quarter while the real has appreciated two percent.

Bank Minutes

Minutes of the central bank’s March 5-6 meeting indicated that an increase in the target lending rate from a record low 7.25 percent wasn’t imminent as policy makers said “a cautious management of monetary policy” was needed. The monetary policy committee will next meet April 16-17 and May 28-29.

The central bank said in a statement today that it is keeping the long-term reference rate, a benchmark used by the state development bank, at a record low 5 percent until June 30.

The Treasury reported a central government primary budget deficit of 6.4 billion reais for February. The median estimate of economists surveyed by Bloomberg was for a surplus of 1.7 billion reais. Tax collection was unusually low in February and will increase as the economy strengthens, Treasury Secretary Arno Augustin told reporters in Brasilia.

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