Brazil’s Swap Rates Decline as Food Inflation Slows; Real Gains

Brazil’s swap rates dropped as a report showed food and beverage prices rose at a slower pace in February, adding to speculation that the central bank will limit further increases in borrowing costs.

Swap rates on contracts maturing in January 2016 fell twelve basis points, or 0.12 percentage point, to 11.99 percent. The real appreciated 0.4 percent to 2.3555 per U.S. dollar.

The national statistics agency reported today that food and beverage prices climbed 0.56 percent in February after increasing 0.84 percent in the prior month. To control inflation, policy makers lifted the target lending rate at their meeting last month by 25 basis points to 10.75 percent, half the pace of the previous six decisions.

“The numbers show that food inflation is in line with the projections of the central bank,” Eduardo Velho, the chief economist at INVX Global Partners in Sao Paulo, said in a phone interview. “That should allow the monetary policy committee to raise the rate by 0.25 percentage point again in April.”

While food-and-beverage inflation slowed, consumer prices rose 5.68 percent in the 12 months through February, more than the median forecast of economists surveyed by Bloomberg, which called for a 5.64 percent increase.

Annual inflation has remained above the 4.5 percent midpoint of the official target range since President Dilma Rousseff took office in 2011 even as economic growth slowed.

Brazil has acted to meet the target, central bank President Alexandre Tombini said in the text of a speech distributed to reporters. The effects of monetary policy are cumulative and appear after a delay, he said.

Brazil Policy

He also said monetary policy must remain especially vigilant and that growth in 2014 will probably be similar to 2013. The economy expanded 2.3 percent last year, according to the national statistics agency.

Brazil posted a foreign-exchange inflow of $2.7 billion this month through March 7, the central bank reported. The year-to-date inflow is $2.5 billion.

To support the currency and limit import price increases, the central bank sold $197.8 million of foreign-exchange swaps today under a program announced in December. It also held an auction to extend maturities on swaps due in April, rolling over $492.8 million.

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