Brazil Swap Rates Surge After Central Bank Signal

Brazil’s swap rates rose the most in three months as the central bank signaled it will extend the world’s biggest increases in borrowing costs after a surprise quickening of inflation last year.

Swap rates on contracts maturing in January 2015 climbed 19 basis points, or 0.19 percentage point, to 10.93 percent at the close of trading in Sao Paulo. The real depreciated 0.1 percent to 2.3614 per U.S. dollar.

The central bank lifted the target lending rate, known as the Selic, by a half-percentage point for a sixth straight meeting yesterday, raising it to 10.50 percent. The decision came after the government reported last week that consumer prices rose 5.91 percent in 2013 even as central bank President Alexandre Tombini said in October that inflation would be less than the prior year’s 5.84 percent.

“It’s likely that the central bank will raise the Selic by another 25 basis points before stopping,” Roberto Padovani, the chief economist at Votorantim Ctvm in Sao Paulo, said in a telephone interview. “The central bank will hinge the next decision on the data.”

Annual inflation missed the official target of 4.5 percent in December for a 40th consecutive month and exceeded all other major Latin American economies except Argentina and Venezuela. The one-year break-even rate, a projection of increases in consumer prices based on the difference in yields between inflation-linked government bonds and fixed-rate debt, touched 7 percent, the highest intraday level since Dec. 6.

Brazil raised borrowing costs in 2013 by 2.75 percentage points from a record low 7.25 percent, the most among 49 major central banks tracked by Bloomberg.

Rousseff Popularity

President Dilma Rousseff is up for re-election in October as she faces accelerating inflation and the risk of delivering the slowest economic growth of any Brazilian president since Fernando Collor, who was forced to resign over corruption charges in 1992. Her popularity fell last year to the lowest in her term as rising prices eroded consumer and business confidence and hindered growth.

The real extend its decline in past three months to 7.7 percent on concern fiscal deterioration under Rousseff’s administration will lead to a lower credit rating and amid speculation that the tapering of Federal Reserve stimulus will undermine demand for the nation’s assets.

Rating Outlooks

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.

“The situation won’t improve and the central bank will raise the rate by another half-percentage point,” Paulo Petrassi, fixed-income manager at Leme Investimentos, said in a phone interview from Florianopolis, Brazil. “They need the backing of fiscal policy to be able to stop.”

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

The central bank also sold $1.23 billion of swaps in the first auction to roll over $11 billion of contracts 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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