Brazil Swap Rates Rise on Concern Weak Real Will Stoke Inflation

Brazil’s swap rates climbed as the real declined for a fourth week, fueling speculation that import prices will rise and fan inflation.

Swap rates on the contract due in January 2015 rose five basis points, or 0.05 percentage point, to 8.60 percent in Sao Paulo, extending their increase this week to eight basis points. The real depreciated 0.4 percent to 2.0515 per dollar today, the lowest level this year, and has fallen 0.8 percent since May 17. Its stretch of weekly losses is the longest since October.

“The rally in the dollar could affect inflation,” Luis Otavio de Souza Leal, the chief economist at Banco ABC Brasil SA in Sao Paulo, said in a telephone interview. “Life is not easy for the central bank.”

Annual inflation has remained above the 4.5 percent midpoint of policy makers’ target range since central bank President Alexandre Tombini took office in January 2011. He reiterated to lawmakers on May 21 that he will do whatever it takes to ensure consumer price increases will start easing in the second half of the year.

Brazil’s central bank raised the target lending rate last month by a quarter-percentage point to 7.50 percent to curb inflation. Policy makers had lowered borrowing costs by 5.25 percentage points in reductions that began in August 2011 to support economic growth.

Real’s Range

The real has traded in a range of 1.94 and 2.05 per dollar this year as Brazil’s policy makers fluctuated between selling currency swaps to prevent it from falling too much and offering reverse currency swaps to protect exporters by reining in gains.

“The real has had a more stable performance relative to its peers only because the market is afraid the central bank will intervene if it depreciates beyond 2.05 per dollar,” Souza Leal said.

Swap rates also rose today as the U.S. Commerce Department reported in Washington that orders for durable goods climbed 3.3 percent last month after dropping 5.9 percent in March. The median forecast of economists surveyed by Bloomberg was for a

1.5 percent increase.

“External uncertainties” require that Brazil’s monetary policy “be managed with caution,” the central bank said in a statement accompanying its April decision. The board’s next rate-setting meeting is May 28-29.

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