Brazil Swap Rates Rise on Outlook for More Increases; Real Falls

Brazil’s swap rates climbed amid speculation the central bank will step up increases in borrowing costs to contain inflation.

Swap rates on the contract due in January 2015 rose five basis points, or 0.05 percentage point, to 8.24 percent. The real fell 0.4 percent to 2.0134 per dollar, reversing earlier gains.

Claudia Safatle, a former press official at the monetary authority, cited in her Valor Economico column a comment from central bank board member Carlos Hamilton last month that policy makers may have to increase the target lending rate at a faster pace to contain inflation. “It is not possible to say whether that means a tightening cycle of 100 points or more,” she said. The central bank didn’t immediately respond to a request for comment from Bloomberg News.

“She talks about hikes of 100 basis points or more while the market had been expecting 100 basis points or less,” Carlos Kawall, an economist at Banco J. Safra in Sao Paulo, said in a telephone interview.

Consumer prices rose 6.49 percent in April from a year earlier, surpassing the 6.42 percent median estimate of 30 economists, the national statistics agency reported yesterday. The central bank has a target range of 2.5 percent to 6.5 percent.

Selic Rate

The bank’s board, known as the Copom, voted 6 to 2 last month to increase the target lending rate to 7.50 percent from a record low 7.25 percent, saying in its statement that the “resilience of inflation” required action.

“I have a growing conviction that the Copom may be prompted to reflect on the possibility of intensifying the use of its monetary policy tool, the Selic rate,” Hamilton said April 25 in Sao Paulo, following the April 16-17 meeting.

Some fellow board members endorsed the comments by Hamilton, said a person familiar with policy matters who asked not to be identified because discussions aren’t public.

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

The real fell as the dollar advanced against 15 of 16 major counterparts after Americans filing claims for jobless benefits unexpectedly dropped last week. The average over the past month fell to the lowest level since before the last recession, showing employers have enough confidence in the economic outlook to hold onto workers.

The national statistics agency reported last week that industrial production expanded 0.7 percent in March, missing the 1.3 percent median estimate of analysts surveyed by Bloomberg. Output contracted 3.3 percent from a year earlier, the biggest drop since December 2012.

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