Brazil Swap Rates Rise as Central Bankers Convene; Real Gains

Brazil’s swap rates climbed on speculation that policy makers convening for a two-day meeting will lift borrowing costs by as much as a half-percentage point for a sixth straight time to curb inflation.

Swap rates on contracts maturing in January 2017 were up for a second consecutive day, rising 12 basis points, or 0.12 percentage point, to 12.37 percent. The real appreciated 0.3 percent to 2.3500 per U.S. dollar, the strongest level this month.

“The market seems to be migrating toward a bet on a rate hike of 50 basis points,” Daniel Weeks, the chief economist at Garde Asset Management in Sao Paulo, said in a phone interview.

The central bank has lifted borrowing costs by 2.75 percentage points since April to 10 percent, the biggest increase among 49 central banks tracked by Bloomberg. The government reported Jan. 10 that consumer prices rose 5.91 percent in 2013 following central bank President Alexandre Tombini’s pledge in October that inflation would be slower than the prior year’s 5.84 percent pace.

Eighteen of the 57 economists surveyed by Bloomberg predict the central bank will raise the target lending rate by 50 basis points to 10.50 percent tomorrow. The rest of them forecast an increase of a quarter-percentage point.

Brazil will increase borrowing costs to 10.50 percent by year-end and 11.50 percent by the close of 2015, according to the median of about 100 estimates in a central bank survey published yesterday.

Declining Real

The real tumbled 7.1 percent in the past three months, the worst performance among 16 major currencies tracked by Bloomberg after South Africa’s rand, on concern fiscal deterioration will lead to a lower credit rating for Brazil and amid speculation that the tapering of Federal Reserve stimulus will sink demand for the nation’s assets.

Standard & Poor’s and Moody’s Investors Service lowered their outlooks last year on Brazil’s credit rating, which both have at two levels above junk. The government budget deficit as a percentage of gross domestic product narrowed to 3 percent in November from 3.4 percent in the prior month, which was the widest since 2009.

To support the currency and limit import price increases, Brazil sold $198 million of foreign-exchange swaps today under a program announced Dec. 18 to offer $200 million each trading day until at least June 30.

The central bank announced Jan. 10 it will hold auctions beginning later this week to roll over $11 billion of currency swaps maturing Feb. 3. It extended maturities in offerings last month on all of the $9.9 billion of contracts due Jan. 2.

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