Brazil Swap Rates Rise on Faster Inflation Outlook; Real Slips

Brazil’s longer-term swap rates climbed as economists raised their 2014 inflation forecast to the highest in almost 15 months, adding to speculation that the central bank will keep increasing borrowing costs.

Swap rates on contracts maturing in January 2018 rose three basis points, or 0.03 percentage point, to 12.78 percent. The real depreciated 0.1 percent to 2.3490 per U.S. dollar.

Inflation in Brazil will accelerate this year to 6.11 percent, according to the median of about 100 estimates in a central bank survey published today. That is the highest forecast since the bank began publishing 2014 figures in January of last year. Policy makers have raised the target lending rate by another 75 basis points this year to 10.75 percent, the largest increase among major economies after Turkey.

“Inflation remains very pressured in the near term,” Leonardo Gomes de Oliveira, an economist at Arsa Investimentos Ltda., said in a telephone interview from in Rio de Janeiro. “Prices in March are rising as well, which fuels expectations the central bank will have to maintain the pace of rate hikes.”

Annual inflation quickened in February to 5.68 percent from 5.59 percent in the prior month. The official target is 4.5 percent, plus or minus 2 percentage points.

Brazil’s labor ministry reported the creation of 260,823 jobs in February, the most since April 2011.

The impact of Brazil’s monetary policy is cumulative and appears with a delay, central bank President Alexandre Tombini said in the text of a speech last week.

The real has fallen 4 percent in the past six months on concern that a widening budget deficit, rising gross debt and sluggish growth will lead to a credit rating downgrade.

To support the currency and limit import price increases, Brazil sold $198.3 million of foreign-exchange swaps today under a program announced in December. The central bank also held an auction to extend maturities on swaps due in April, rolling over $492.1 million.

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