Brazil Swap Rates Rise Before Central Bank Decision; Real Falls

Brazil’s swap rates climbed as all except two of the economists surveyed by Bloomberg forecast that the central bank will sustain the pace of increases in borrowing costs as policy makers converged for a two-day meeting.

Swap rates due in January 2015 rose nine basis points, or

0.09 percentage point, to 10.43 percent at 11:19 a.m. in Sao Paulo. The real fell 0.8 percent to 2.3989 per dollar as turmoil in Syria reduced demand for emerging-market assets. The currency dropped last week to a four-year low of 2.4543, prompting the central bank to announce a $60 billion intervention program to support the real.

Policy makers will raise the target lending rate by a half-percentage point to 9 percent tomorrow, matching the increase in July, according to 48 of 50 economists surveyed by Bloomberg. Annual inflation eased to 6.15 percent in the month through mid-August after surpassing the 6.5 percent upper limit of the central bank’s target range earlier this year.

“Inflation is still pretty close to the upper boundary of the target,” Michael Henderson, an emerging-market economist at Capital Economics, said in a telephone interview from London. “The central bank isn’t going to step down from its current pace of rate hikes.”

The real dropped against the dollar along with most emerging-market currencies as U.S. Secretary of State John Kerry said Syria will be held accountable for using chemical weapons.

Brazil’s currency rallied the most in almost two years on Aug. 23, the day after the central bank announced a plan to shore up the real by auctioning $1 billion of dollar loans every Friday and offering $500 million of currency swaps Monday through Thursday for the rest of the year. As part of the program, the central bank sold $498 million of currency swap contracts today.

Real’s Decline

The real has fallen 14 percent in the past three months, the biggest drop after the Indian rupee among emerging-market dollar counterparts, making imports more expensive.

“If it hadn’t been for this foreign-exchange package, the central bank probably would’ve come up with more aggressive hiking, but for now that program is enough to keep them at 50 basis point increases,” Henderson said.

Brazil has raised its target lending rate in 2013 more than any major economy, increasing by 1.25 percentage points from a record low 7.25 percent in April.