Brazilian Swap Rates Rise on Inflation Outlook; Currency Climbs

Brazil’s swap rates climbed to a two-week high after the central bank raised its forecast for 2014 inflation, adding to speculation that policy makers will sustain the pace of increases in borrowing costs.

Swap rates due in January 2015 added nine basis points, or 0.09 percentage point, to 10.23 percent at 11:06 a.m. in Sao Paulo, the highest level on a closing basis since Sept. 17. The move extended their quarterly increase to 36 basis points. The real appreciated 0.7 percent to 2.2359 per dollar today, paring its decline since the end of June to 0.2 percent.

Traders maintained bets that policy makers will increase the lending rate by a half-percentage point in October for a fourth straight meeting. The central bank said in its quarterly inflation report today that consumer prices will rise 5.7 percent next year even if policy makers raise the target rate, currently at 9 percent, to 9.75 percent by year-end. The June projection was for annual inflation of 5.2 percent.

“The message from the central bank is that it will keep raising rates,” Flavio Serrano, a senior economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a telephone interview. “The increase in the inflation forecast for 2014 was a surprise. The fact that the central bank took into account a more depreciated exchange rate changed the inflation dynamics.”

Central bank President Alexandre Tombini reiterated last week that policy makers must remain vigilant to prevent the real from weakening and fueling inflation.

Currency Inflation

The real has rallied 9.4 percent since Aug. 22, when the central bank announced a $60 billion program to bolster the currency and curb inflation. The gain is the biggest among all of the world’s currencies tracked by Bloomberg.

The central bank said today in its report that the inflation outlook takes into account a fiscal policy that will help close the gap between demand and output. It said the government has room to shift fiscal policy to neutral from expansionary. The 2013 growth estimate was lowered to 2.5 percent from 2.7 percent.

Policy makers have raised the benchmark lending rate by 175 basis points to 9 percent since April, the most in the world. Inflation breached their target range of 2.5 percent to 6.5 percent twice this year. Brazilian consumer prices rose 5.93 percent in the year through mid-September, the first time in nine months annual inflation was below 6 percent.

Before it's here, it's on the Bloomberg Terminal.