Brazilian Swap Rates Fall After Industrial Drop; Real Advances

Brazilian swap rates declined from a two-year high as a bigger-than-forecast drop in industrial production added to speculation that the central bank will limit further increases in borrowing costs.

Swap rates on contracts maturing in January 2015 fell 16 basis points, or 0.16 percentage point, to 11.57 percent at the close in Sao Paulo after climbing yesterday to 11.73 percent, the highest since August 2011. The real appreciated 1.4 percent to 2.4055 per dollar, the most since November, after dropping yesterday to a five-month low in an emerging-market selloff.

Industrial production dropped 3.5 percent in December from a month earlier in the biggest decline in five years, the national statistics agency reported today. The median forecast of economists surveyed by Bloomberg was for a decrease of 1.7 percent. President Dilma Rousseff’s administration is working to spur economic growth while also curbing above-target inflation.

“The data from December was weak, and when you look at 2014, the outlook is even worse,” Sergio Vale, the chief economist at MB Associados, said by phone.

Rousseff, who is eligible to run for re-election in October, told Congress yesterday that her commitment to slowing consumer price increases is non-negotiable.

“I reaffirm our commitment to measures aimed at converging inflation to the center of the target range,” she wrote in her message to lawmakers.

Quickening Inflation

Inflation in Brazil accelerated to 5.91 percent in 2013 from 5.84 percent in the prior year as a weaker real raised the price of some imports. The increase in consumer prices exceeded the 4.5 percent midpoint of the central bank’s target range for a fourth straight year.

Policy makers lifted the target lending rate by 50 basis points on Jan. 15 for a sixth consecutive time, increasing it to 10.50 percent, to contain inflation.

The real gained a day after Brazil announced auctions beginning Feb. 6 to extend the maturity on foreign-exchange swaps maturing in March as part of an effort to support the currency and limit import price increases. Today, the central bank sold $197 million of swaps under daily auctions announced Dec. 18.

“The government announced the beginning of the auctions to extend maturities on foreign-exchange swaps much earlier not to generate speculation but for the market to be prepared,” Jose Carlos Amado, currency trader at Renascenca DTVM in Sao Paulo, said in a phone interview.

Tombini Stance

Central bank President Alexandre Tombini said last week that Brazil is combating inflation in the context of a falling real, which has lost 6.6 percent in the past three months. The currency has dropped on concern Brazil’s fiscal deterioration will lead to a lower credit rating and amid speculation that the tapering of Federal Reserve stimulus will erode demand for emerging-market assets.

The Brazilian government’s budget deficit grew in December to 3.3 percent of gross domestic product, compared with 3.4 percent in October, the widest in four years.

“A tightening of fiscal policy would enhance the credibility of Brazil’s overall macroeconomic policy framework and help in placing the government’s debt dynamics on stronger footing,” Fitch Ratings said today in a report. The company rates the nation at BBB, the second-lowest investment grade.

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