Brazil Swap Rates Decline After Inflation Report; Real Weakens

Brazil’s swap rates fell as an April gauge of inflation was lower than economists forecast, spurring speculation that the central bank will limit increases in borrowing costs.

Swap rates due in January 2015 declined four basis points, or 0.04 percentage point, to 8.24 percent in Sao Paulo. The real slid 0.4 percent to 2.0073 per dollar.

The Getulio Vargas Foundation reported today that its IGP-M index of wholesale, construction and consumer prices rose 7.30 percent in April from a year earlier after climbing 8.06 percent in the prior month. The median forecast of economists surveyed by Bloomberg was for a 7.35 percent increase.

“The IGP-M inflation indicator was well-behaved,” Andre Perfeito, the chief economist at Gradual Investimentos in Sao Paulo, said in a telephone interview. “The data suggest a more dovish attitude to come in monetary policy.”

The central bank’s policy committee voted 6 to 2 on April 17 to increase the target lending rate to 7.50 percent from a record low 7.25 percent, saying that “the high level of inflation” and its “resilience” required a response.

Swap rates tumbled the day after the April meeting as the increase in borrowing costs was less than some analysts had forecast. A survey by Bloomberg showed that 18 of 58 analysts had projected an increase of 50 basis points.

Consumer prices rose at an annual rate of 6.59 percent in March, exceeding the 6.50 percent upper limit of the central bank’s preferred range for the first time since November 2011. The target is 4.50 percent, plus or minus 2 percentage points.

Hamilton’s Comment

Carlos Hamilton, the central bank’s director for economic policy, said last week the monetary authority may have to step up the pace of increases in borrowing costs to curb inflation.

The real rallied to a level stronger than 2 per dollar on April 26 for the first time in eight days as initial public offerings for companies including BB Seguridade Participacoes SA, the insurance unit of Banco do Brasil SA, lured foreign investors to Brazil’s economy.

“The real was boosted last week by a combination of IPO-related inflows and central bank monetary policy director Hamilton’s comments that seemed to open the door for an acceleration of the tightening cycle,” Eduardo Suarez, a Latin America currency strategist at Bank of Nova Scotia in Toronto, said in an e-mailed note to clients. “But the range for the time being appears to be 1.95-2.05.”

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