Brazil Swap Rates Surge on Mantega Inflation Comment; Real Gains

Brazil’s swap rates climbed to a 10-month high and the real strengthened after Finance Minister Guido Mantega said the government may raise interest rates to control inflation.

Swap rates on the contract due in January 2014 rose 25 basis points, or 0.25 percentage point, to 8.17 percent at the close of trading in Sao Paulo, the highest level since June. They increased 41 basis points over the past five days. The real rallied 0.3 percent to 1.9695 per dollar, the highest since March 12, after erasing a drop of as much as 0.3 percent. The gain pushed this week’s advance to 0.8 percent.

Brazil’s government may take unpopular measures including raising benchmark borrowing costs, Mantega said at an event today in Sao Paulo. The central bank, which is scheduled to meet April 16-17, has maintained the target rate at a record low 7.25 percent since October to avoid jeopardizing the recovery without further fueling inflation.

“For Mantega to have spoken about unpopular measures, it’s because an increase in rates is a given,” Francisco Carvalho, exchange-rate director at BGC Liquidez, said by phone from Sao Paulo.

Swap rates also increased after the central bank reported that economic activity rose 0.44 percent in February from a year earlier, surpassing the 0.10 percent median forecast of economists surveyed by Bloomberg. The national statistics agency said on April 10 that annual inflation accelerated to 6.59 percent in March, exceeding the 6.50 percent upper limit of the central bank’s target range for the first time since November 2011.

“There is not and there won’t be tolerance of inflation,” central bank President Alexandre Tombini told reporters in Rio de Janeiro. “We are closely monitoring all indicators and in the future will make decisions on the best course for monetary policy.”

‘Cautious Management’

“The better-than-expected economic activity number could make the central bank more comfortable raising interest rates in April,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA, said in a phone interview.

Minutes of the central bank’s March 5-6 meeting indicated an increase in the benchmark lending rate from a record low wasn’t imminent as policy makers said “a cautious management of monetary policy” was needed.

The prospect of a rate increase next week also bolstered the real by increasing demand for higher-yielding Brazilian assets, Carvalho said.

“With the expectation of higher rates and initial public offerings, there should be more inflows, so it’s difficult for the dollar to stay at a very strong level,” he said.

Banco do Brasil SA, Latin America’s biggest lender by assets, is planning a $6 billion initial public offering for its insurance unit, the company said April 3.

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 reining in gains.

The currency closed on April 5 at a level stronger than 2 per dollar for the first time since March 20 after Mantega said the government was studying cuts in taxes on profits earned by Brazilian companies abroad for products including ethanol.

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