Brazilian Swap Rates Fall After Inflation Report as Real Rises

Brazil’s swap rates extended their weekly drop to the biggest since September as slower than forecast inflation added to speculation that the central bank will limit further increases in borrowing costs.

Swap rates on contracts maturing in January 2015 fell 11 basis points, or 0.11 percentage point, to 11.38 percent, extending the weekly decrease to 31 basis points. The real appreciated 0.1 percent to 2.3792 per dollar and was up 1.4 percent this week.

Brazil’s IPCA index of consumer prices increased 5.59 percent in the 12 months through January, slower than all of the forecasts of economists surveyed by Bloomberg. The official target is 4.5 percent, plus or minus 2 percentage points. Inflation accelerated to 5.91 percent in 2013 from 5.84 percent in the prior year.

“The IPCA coming below expectations is good,” Andre Perfeito, the chief economist at Gradual Investimentos in Sao Paulo, said in a phone interview. “In the medium and longer term, inflation persists.”

Transportation prices fell 0.03 percent in January from a month earlier after a 1.85 percent increase in December, the national statistics agency reported. Last June, bus fare increases triggered the largest street protests in two decades. Clothing prices dropped 0.15 percent last month.

Policy makers in Brazil voted unanimously on Jan. 15 to lift the target lending rate by a half-percentage point for a sixth straight time, raising it to 10.50 percent. They will increase borrowing costs to 11 percent by year-end as inflation accelerates to 6 percent, according to the median forecasts of economists in a central bank survey published Feb. 3.

Tombini Stance

Central bank President Alexandre Tombini said last week that the nation is combating inflation in the context of a declining real, which lost 2.1 percent in January.

President Dilma Rousseff, who is eligible to run for re-election in October, wrote in a message to lawmakers Feb. 3 to “reaffirm our commitment to measures aimed at converging inflation to the center of the target range.”

The real dropped last month on concern 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.

To support the real and limit import price increases, Brazil’s central bank sold $197 million of foreign-exchange swaps today as part of daily offerings announced Dec. 18. It also held an auction to extend maturities on swaps due in March, rolling over $516.7 million.

Payrolls in the U.S. rose less than projected in January as retailers cut back after the holidays and government hiring fell, a Labor Department report showed. The unemployment rate unexpectedly fell to 6.6 percent.

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