Brazil Swap Rates Rise on European Stimulus Outlook; Real Gains

Brazil’s swap rates climbed from a two-month low as the prospect of European monetary stimulus fueled speculation that the South American country’s central bank will raise borrowing costs to contain inflation.

Swap rates due in January 2015 rose three basis points, or 0.03 percentage point, to 8.28 percent in Sao Paulo. They ended yesterday at the lowest level since Feb. 14. The real gained 0.6 percent to 2.0103 per dollar, erasing earlier losses.

“The markets are preferring to ignore bad indicators and are expecting stimulus measures, mainly in the euro region,” Daniel Cunha, an economist at XP Investimentos, said in a telephone interview from Rio de Janeiro.

Brazil’s swap rates tumbled on April 18, the day after the central bank raised borrowing costs less than some analysts had forecast. Board members voted 6 to 2 to increase the target lending rate by 25 basis points to 7.50 percent from a record low 7.25 percent. A survey by Bloomberg showed that 18 of 58 analysts had forecast an increase of 50 basis points.

Policy makers said in their statement that “the high level of inflation” and “resilience of inflation” required a response tempered by the central bank’s recognition that “external uncertainties” also required “that monetary policy be managed with caution.”

Minutes of the April 16-17 meeting are due tomorrow.

Brazil’s consumer prices rose at an annual rate of 6.59 percent in March, exceeding the upper limit of the central bank’s preferred range for the first time since November 2011. The target is 4.5 percent, plus or minus 2 percentage points. Latin America’s largest economy grew 0.9 percent in 2012, compared with 2.7 percent in 2011 and 7.5 percent in 2010.

ECB Rate

The European Central Bank will cut its target lending rate to a record low next week to boost a slumping euro-region economy, according to Nomura Holdings Inc., UBS AG and Royal Bank of Scotland Group Plc.

The real was headed for a second straight week of trading weaker than 2 per dollar as policy makers swung this year between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by reining in gains.

Brazil’s current account deficit of $6.9 billion in March was deeper than the $6.6 billion shortfall in February, the central bank reported. Foreign direct investment increased to $5.7 billion from $3.8 billion a month earlier.

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