Brazilian Swap Rates Rise After Central Bank Signal; Real Falls

Brazilian swap rates climbed the most in a week after the central bank raised borrowing costs by a half-percentage point and signaled that it will maintain the pace of increases.

Swap rates on contracts maturing in January 2015 rose 23 basis points, or 0.23 percentage point, to 10.41 percent. The real slid 0.6 percent to 2.3595 per dollar after dropping Aug. 21 to a four-year low of 2.4543.

Policy makers voted unanimously to lift the target lending rate to 9 percent yesterday as forecast by swaps traders in the third straight 50 basis-point increase. The statement accompanying the decision said the move will help “put inflation on a decline and assure that this trend will persist next year.” The statement was almost identical to the one issued July 10.

“The only thing we can read is that they will maintain the pace of hikes,” Pedro Tuesta, a senior economist at 4cast Ltd. in Washington, said in a telephone interview.

The central bank rejected all bids after offering as much as $1 billion in foreign-exchange credit lines in two rollover auctions today. The offering was in addition to a $60 billion intervention program announced last week to support the currency. The Treasury sold 3 billion reais of zero-coupon bonds due in 2014, 2015 and 2017.

To curb inflation, policy makers have raised their benchmark lending rate by 1.75 percentage points since April from a record low 7.25 percent, more than any other central bank tracked by Bloomberg.

Annual Inflation

Annual inflation slowed 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.

The real has tumbled 10.6 percent in the past three months, undermining the goal of curbing inflation while promoting growth. Since Aug. 22, when the bank announced its intervention program, the currency has rallied 3.2 percent, the best performance among all dollar counterparts tracked by Bloomberg.

Analysts following the economy have cut their 2013 and 2014 median growth forecasts by more than a percentage point since January, according to a central bank survey published Aug. 26. Finance Minister Guido Mantega rolled back 2013 economic growth estimates to about 2.5 percent from a forecast of 3 percent to 4 percent expansion earlier this year.

“The central bank used to have a double mandate: inflation and economic growth,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil SA, said by phone from Sao Paulo before yesterday’s meeting. “Now we are seeing the central bank focus more exclusively on inflation control.”

Brazil’s monetary policy seeks to mitigate inflation risk, central bank president Alexandre Tombini said in a statement on Aug. 19. Inflation is under control and officials will work to avoid currency pass-through to consumer prices, Mantega said a week later.

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