Brazilian Swap Rates Decline After Inflation Report; Real Rises

Brazil’s swap rates dropped 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 2017 fell 11 basis points, or 0.11 percentage point, to 12.73 percent, paring the weekly increase to 18 basis points. The real appreciated 0.1 percent to 2.3251 per dollar, extending its gain since March 14 to 0.9 percent, the best performance among major currencies tracked by Bloomberg.

The national statistics agency reported today that consumer prices climbed 0.73 percent in the month through mid-March, below the median forecast of economists surveyed by Bloomberg, which called for a 0.75 percent increase. To curb inflation, policy makers have raised the target lending rate by 75 basis points this year to 10.75 percent, the largest increase among major economies after Turkey.

“The inflation numbers show slower pressure on prices than the market expected,” Leonardo Gomes de Oliveira, an economist at Arsa Investimentos Ltda., said by phone from Rio de Janeiro. “This is a positive sign for the central bank.”

Trade Minister Mauro Borges told reporters in Brasilia that the real is at a more stable level as central bank policy helped currency volatility drop.

Three-month historical volatility, measuring swings in Brazil’s currency during the period, fell today to 11.6 percent, the lowest since June 2013.

To support the real and limit import price increases, Brazil sold $198 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.

Annual Inflation

Inflation accelerated in the 12 months through mid-March to 5.90 percent from 5.65 percent, compared with the 5.91 percent median forecast. Central bank President Alexandre Tombini reiterated this week that policy makers are acting to ensure inflation will slow to the 4.5 percent official target.

Brazil raised the benchmark lending rate on Feb. 26 by a quarter-percentage point to 10.75 percent following six straight half-point increases. Analysts in a central bank survey published March 17 forecast the benchmark will end the year at 11 percent as economic growth slows to 1.7 percent from 2.3 percent in 2013.

Policy makers must remain “especially vigilant,” Tombini told a Senate hearing March 18. The biggest impact from increasing borrowing costs has yet to materialize while a jump in fresh food prices may be temporary, he said.

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