Brazil Swap Rates Surge on Industrial Output Gain; Real Declines

Brazil’s swap rates climbed the most in six weeks as higher industrial production spurred speculation that the central bank will sustain the pace of increases in borrowing costs to curb inflation.

Swap rates due in January 2015 rose 25 basis points, or 0.25 percentage point, to 9.84 percent in Sao Paulo, the biggest increase since June 18. The real dropped 1.2 percent to 2.3042 per U.S. dollar, the weakest level since March 2009.

Industrial output rose 1.9 percent in June from a month earlier, exceeding the 1.3 percent median forecast of economists surveyed by Bloomberg. Policy makers raised the target lending rate by a half-percentage point July 10 to 8.50 percent, the third advance this year. The central bank said in minutes of the meeting that it is appropriate to maintain the pace of increases in borrowing costs to curb inflation.

“The increase in industrial production put the economy on a path for higher growth in the second quarter,” Carlos Kawall, the chief economist at Banco J. Safra in Sao Paulo, said in a telephone interview.

The real declined after U.S. jobless claims unexpectedly dropped to a five-year low, reviving concern that the Federal Reserve will start curtailing monetary stimulus this year. The real climbed yesterday after the Fed said it would maintain the program of monthly bond purchases that has supported emerging-market assets.

The real has tumbled 13 percent in the past three months, the biggest drop among 24 emerging-market dollar counterparts. A weaker currency makes imports more expensive and threatens to further fuel inflation, which helped spark nationwide street protests in June.

The government will cut import tariffs on basic materials from steel to textiles to improve competitiveness and help ease price increases, Finance Minister Guido Mantega told reporters today in Brasilia.

Brazil reported a July trade deficit of $1.9 billion. The median estimate by economists surveyed by Bloomberg was for a surplus of $400 million.

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