Brazil Swap Rates Rise on Bank’s Inflation Signal; Real Declines

Brazil’s swap rates climbed after the central bank said it must remain “especially vigilant” on inflation, adding to speculation that policy makers will maintain the pace of increases in borrowing costs.

Swap rates on contracts maturing in January 2015 rose nine basis points, or 0.09 percentage point, to 10.63 percent at the close in Sao Paulo and were up 12 basis points this week. The real fell for a third straight day, depreciating 1.3 percent to 2.3874 per U.S. dollar today, the worst performance among 24 emerging-market counterparts. It extended its drop since Dec. 13 to 2.4 percent.

The central bank said in a quarterly inflation report published today that consumer prices will rise 5.6 percent next year, a pace that is still more than a percentage point higher than Brazil’s 4.5 percent target. Policy makers raised the benchmark lending rate to 10 percent on Nov. 27, increasing it by a half-percentage point for a fifth consecutive time.

“The central bank kept the word ‘vigilant,’ which signals it may keep raising the target rate 0.50 percentage point,” Mauricio Junqueira, who helps oversee 750 million reais at Tese Gestao de Investimentos, said by phone from Rio de Janeiro.

Brazil has raised the target lending rate by 2.75 percentage points since April, the most among 49 central banks tracked by Bloomberg.

The real has fallen 7.1 percent in the fourth quarter on concern Brazil’s fiscal deterioration will lead to a reduced credit rating and amid speculation that the tapering of Fed stimulus will sink demand for the nation’s assets.

Credit Outlook

Standard & Poor’s and Moody’s Investors Service lowered their outlooks this year on Brazil’s credit rating, which both have at two levels above junk. The government’s budget deficit as a percentage of gross domestic product swelled to 3.4 percent in October, the widest since 2009.

The central bank said Dec. 18 that it plans next year to reduce the intervention program announced in August to support the currency and limit import price increases. It will auction $200 million of foreign-exchange swaps on trading days from January through at least the end of June, down from offerings of $500 million four days a week this year.

The Fed said this week that it will lower its monthly asset purchases to $75 billion from $85 billion, citing an improved outlook for U.S. employment.

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