Brazil Swap Rates Rise on Faster Inflation Outlook; Real Falls

Brazil’s swap rates climbed after economists raised their 12-month inflation forecast for a fourth straight week, adding to speculation that the central bank will step up increases in borrowing costs.

Swap rates due in January 2015 rose eight basis points, or 0.08 percentage point, to 9.48 percent. The real depreciated 0.5 percent to 2.2684 per U.S. dollar, extending its drop in the past three months to 12 percent, the worst performance among emerging-market dollar counterparts tracked by Bloomberg. The currency has weakened 1.6 percent in July.

“You need to tighten more on the monetary side unless there’s room to let inflation accelerate, and I don’t think there is,” Eduardo Suarez, a foreign-exchange strategist at Bank of Nova Scotia, said in a telephone interview from Toronto.

Economists raised their 12-month forecast for the annual inflation rate to 5.83 percent from 5.78 percent a week earlier, according to the median of about 100 estimates in a central bank survey published today.

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

Brazil’s policy makers raised the target lending rate by a half-percentage point on July 10 to 8.50 percent, the third increase this year. The central bank said in minutes of the meeting that it is appropriate to maintain the pace of increases to curb inflation. Policy makers are next scheduled to decide on borrowing costs Aug. 27-28.

Fiscal Policy

Looser fiscal policy means Brazil needs tighter monetary policy, according to Suarez. The primary budget surplus, excluding interest payments, was 1.3 billion reais in June, compared with 6 billion reais in the prior month, Brazil’s Treasury reported July 26.

Finance Minister Guido Mantega asked International Monetary Fund Managing Director Christine Lagarde in a letter dated July 25 to change the way the lender calculates Brazil’s gross debt.

The IMF said Brazil’s gross debt reached 68 percent of GDP last year, while the central bank said 59 percent. Mantega said the IMF counts as debt the part of the central bank’s portfolio that is not being used as collateral, which results in “overestimated” gross debt. A Veja columnist, Lauro Jardim, first reported on Mantega’s request.

The government is reducing expenditures by 10 billion reais and lowering this year’s economic growth forecast to 3 percent from 3.5 percent, Mantega said July 22.

Import Prices

The real’s depreciation pushes up the price of imports and threatens to further fuel inflation, which helped spark nationwide street protests last month. The central bank sold $994 million of foreign-exchange swaps on July 26 in the fourth day of intervention last week to stem the currency’s decline.

The currency “has established a 2.21 to 2.27 range since the start of July,” with the central bank repeatedly stepping in to support the real to curb inflation, Suarez wrote in an e-mailed note to clients today. “Despite the reduced downside presented by central bank intervention, sentiment remains unsupportive in our view, curbing the real’s potential upside.”

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