Brazil Swap Rates Drop After Central Bank Statement; Real Rises

Brazil’s shorter-term swap rates declined as policy makers damped speculation they would step up the pace of interest-rate increases after raising the benchmark rate by 50 basis points for a second straight meeting.

Swap rates on contracts due in January fell one basis point, or 0.01 percentage point, to 8.79 percent. They dropped on July 8 to 8.78 percent, the lowest closing level since June 14. The real appreciated 0.4 percent to 2.2556 per dollar after falling 0.4 percent.

Policy makers raised the target lending rate to 8.50 percent yesterday, as forecast by all 51 analysts surveyed by Bloomberg. The central bank’s statement repeated the language used after the previous meeting, a sign that policy makers won’t quicken the pace of rate increases after inflation exceeded the government’s target range, according to David Beker, an economist at Bank of America Corp.

“There were some marginal expectations of an acceleration in the pace of increases, and the fact that they didn’t change their statement was read by markets as the central bank is comfortable with this strategy,” Beker said in a phone interview from Sao Paulo.

The real erased its drop as Federal Reserve Chairman Ben S. Bernanke said yesterday that “highly accommodative monetary policy for the foreseeable future is what’s needed,” buoying demand for emerging-market assets, which have benefited from U.S. monetary stimulus.

Brazil’s central bank eliminated some capital requirements that increased the cost for banks to raise dollar funds abroad, according to a decision published today. The central bank’s press office said the move was impacting the currency.

Longer-term swap rates climbed, with those on the contract maturing in January 2016 increasing five basis points to 10.45 percent after falling yesterday to 10.40 percent, the lowest level since June 17.

Accelerating Inflation

Inflation in Brazil quickened to a 20-month high of 6.70 percent in June, exceeding the 6.50 percent upper level of central bank’s target range.

The central bank board, known as Copom, will raise the target rate by 50 basis points at each of their next two meetings before finishing the year with a quarter-point increase, Itau economists Ilan Goldfajn and Caio Megale wrote in a note e-mailed to investors yesterday.

“By maintaining the pace of rate hikes and the statement, the Copom suggests comfort in its plan to fight inflation,” they wrote.

The central bank has raised its target rate three times this year, increasing it by 125 basis points from a record low 7.25 percent. It lifted the benchmark by a quarter-percentage point in April and 50 basis points in May.

The real has weakened 13 percent in the past three months, making it the biggest loser among the 24 major emerging-market currencies tracked by Bloomberg.

Brazil Protests

The depreciation pushes up the price of imports and threatens to further fuel inflation that helped spark nationwide demonstrations last month.

Protesters took to the streets in June to oppose a bus fare increase in Sao Paulo. Discontent later spread to other metropolitan centers including Brasilia, Porto Alegre and Rio de Janeiro, as demonstrators expanded their grievances to include corruption and public services.

Citing a need to rein in federal spending, Finance Minister Guido Mantega on June 27 decided to gradually unwind tax cuts on home appliances. Days later, President Dilma Rousseff said that fiscal control helps contain inflation.

The central bank board will contribute by tightening monetary conditions at future meetings, said John Welch, a strategist at Canadian Imperial Bank of Commerce. Welch, like Itau, expects two more half-point increases followed by a quarter-point raise.

‘Tighten More’

“The central bank is going to tighten more,” he said by phone from Toronto after yesterday’s decision. “They have to tighten more and they have to do it quickly if they want to control inflation”

Brazil, Egypt and Indonesia are the only three major economies tracked by Bloomberg that are raising interest rates as emerging markets take steps to stem capital outflows sparked by concern the U.S. Fed will start to scale back monetary stimulus.

“Emerging markets will now have to compete for capital with the U.S.,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento, said by phone from Sao Paulo. “Countries that carried out the necessary adjustments will suffer less. Brazil is likely to suffer more.”

New leaders in China reined in credit growth as President Xi Jinping signaled last month he will tolerate slower growth amid signs banks have overextended their finances by lending to property companies and local governments.

Rupee’s Plunge

In India, a plunge in the rupee prompted the nation’s market regulator to tighten rules on futures and options transactions this week, while the central bank barred banks from proprietary trading of such contracts. The Reserve Bank of India also held interest rates last month for the first time in four reviews, citing inflation risks.

Indonesia raised its key rate by 50 basis points, more than forecast, to 6.5 percent today to bolster a weakening currency and ease inflation pressures after the government increased fuel prices last month.

Brazil’s government reported on May 29 that the expansion of gross domestic product unexpectedly slowed to 0.55 percent in the first quarter. Economists cut their growth forecasts for Brazil for this year and next to below 3 percent for the first time, according to the July 5 central bank survey.

Retail Sales

Retail sales were unchanged in May from a month earlier, following a revised 0.6 percent increase in the prior month, the national statistics agency said today. The median forecast of analysts surveyed by Bloomberg was for a drop of 0.4 percent. Industrial output declined 2 percent in May, worse than all 29 forecasts of analysts surveyed by Bloomberg.

“Economic activity is weak, and that’s a sign that inflation continues to be high,” Darwin Dib, the chief economist at CM Capital Markets Asset Management, said by phone from Sao Paulo before yesterday’s decision.

Brazil’s Ibovespa has declined 33 percent in dollar terms in 2013, the worst performance among 94 global benchmark indexes after the Lima General Index. The Hang Seng China Enterprises Index has dropped 18 percent.

Bernanke said on June 19 that $85 billion of monthly bond purchases may end by mid-2014, helping drive this year’s 7.9 percent slide in India’s rupee and a 6.7 percent drop in the Polish zloty. Weakening currencies are threatening to ignite inflation, forcing central banks in some emerging markets to curtail interest-rate cuts even as their economies expand at the slowest pace since 2009.

Yesterday, Bernanke called for maintaining accommodation even as the minutes of U.S. policy makers’ June meeting showed a debate over whether to stop bond buying by the Fed in 2013.

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