Brazil Swap Rates Rise on Inflation Concern; Currency Declines

Most of Brazil’s swap rates climbed as U.S. economic strength fueled speculation that the South American nation’s central bank will step up increases in borrowing costs later this year to curb inflation.

Swap rates on the contract due in January 2015 rose one basis point, or 0.01 percentage point, to 8.61 percent in Sao Paulo, the highest level on a closing basis since April 17. The real dropped 0.9 percent to 2.0749 per U.S. dollar, the weakest closing level since Dec. 24.

The real slid on concern the Federal Reserve will curtail a stimulus program that has buoyed emerging-market assets. Brazil’s shortest-term swap rates fluctuated as some traders speculated that a tightening of monetary policy will be limited at the two-day meeting that begins today.

Most swap rates “are being influenced by the international market,” Marcelo Schmitt, a fund manager at SulAmerica Investimentos in Sao Paulo, said in a phone interview. “The market is very divided over whether they will raise by 25 or 50 basis points” at this week’s meeting.

Of 57 economists surveyed by Bloomberg, 38 predict that the target lending rate will be lifted by 0.25 percentage point tomorrow, while 19 see an increase of a half-percentage point.

Brazil’s central bank raised its benchmark last month by a quarter-percentage point to 7.50 percent as inflation accelerated. It had reduced borrowing costs by 5.25 percentage points in reductions that began in August 2011 to support economic growth.

Annual inflation has remained above the 4.5 percent midpoint of their preferred range since central bank President Alexandre Tombini took office in January 2011.

‘External Uncertainties’

Most swap rates rose today after a report from the Conference Board showed confidence among U.S. consumers climbed in May to its highest level in more than five years as views on the economy and labor market improved.

“External uncertainties” require that Brazil’s monetary policy “be managed with caution,” the central bank said in a statement accompanying its April decision.

The real has traded in a range of 1.94 and 2.07 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 Brazilian currency has lost over 25 percent since reaching a 12-year high on July 26, 2011, the worst performance among major currencies after the South African rand, according to data compiled by Bloomberg.

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