Brazil Swap Rates Fall After Inflation Report: Sao Paulo Mover

Brazil’s swap rates declined the most in a month as slower-than-forecast inflation overshadowed policy minutes indicating that the central bank will sustain the pace of increases in borrowing costs.

Swap rates on contracts maturing in January 2015 dropped five basis points, or 0.05 percentage point, to 11.02 percent at 1:43 p.m. in Sao Paulo, the biggest reduction on a closing basis since Dec. 11. The real fell 0.5 percent to 2.3852 per U.S. dollar, the weakest level since Jan. 9.

Consumer prices rose 5.63 percent in the 12 months through mid-January, the slowest pace since October 2012, the national statistics agency said today. The median forecast of economists surveyed by Bloomberg was 5.76 percent. The report came after the central bank raised the target lending rate, known as the Selic, by 50 basis points on Jan. 15 for a sixth consecutive time, increasing it to 10.50 percent.

“After the surprisingly low numbers, policy makers are more likely to raise the Selic by a quarter-percentage point at the next meeting,” Leonardo Gomes de Oliveira, an economist at Arsa Investimentos Ltda., said in a telephone interview from Rio de Janeiro.

The real dropped 7.8 percent in the past three months on concern fiscal deterioration under President Dilma Rousseff will lead to a lower credit rating and amid speculation that the tapering of Federal Reserve asset purchases will erode demand for Brazil’s assets.

A reduction in Fed stimulus as the U.S. economy recovers may push the real and other emerging-market currencies down, Finance Minister Guido Mantega told reporters in Davos, Switzerland, today.

Policy Minutes

The central bank said in minutes of the Jan. 14-15 meeting it will remain especially vigilant as consumer prices rise slightly more than anticipated.

Policy makers consider it “appropriate to continue the current pace of adjustments to the monetary conditions,” they said in the minutes, published today. “Available information suggests certain persistence in inflation, which reflects in part the fact service inflation continues at high levels.”

Last week’s decision to raise borrowing costs followed a government report showing consumer prices rose 5.91 percent in 2013 even as central bank President Alexandre Tombini said in October that inflation would be slower than the prior year’s 5.84 percent pace.

The central bank sold $198 million of foreign-exchange swaps today under a program announced Dec. 18 to support the currency and limit import price increases. Brazil extended the maturity on $1.23 billion of swaps due Feb. 3, raising the amount rolled over to $7.4 billion out of a total of $11 billion. The bank extended maturities in offerings last month on all of the $9.9 billion of contracts due Jan. 2.

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