Brazilian Swap Rates Drop With Real After Minutes

Brazil’s shorter-term swap rates fell as minutes of the central bank’s meeting last week added to speculation that policy makers will limit further increases in borrowing costs.

Swap rates on contracts maturing in January 2015 dropped five basis points, or 0.05 percentage point, to 11.05 percent today in Sao Paulo. The real fell for the first time in five days, weakening 0.9 percent to 2.2068 per U.S. dollar.

Policy makers said in minutes of their April 1-2 meeting that the recent jump in food prices will be temporary and that the tightening of monetary policy has yet to work its way through the economy. Central bank President Alexandre Tombini told reporters in Washington that inflation will slow once temporary food inflation passes.

“The market is reacting to the dovish tone of the minutes,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a phone interview. “They’re signaling that their rate hikes are still going to have an effect.”

Policy makers increased the target lending rate by a quarter-percentage point in April and February after raising it by 50 basis points at each of the six prior meetings. The nine increases since April 2013, bringing the rate to 11 percent, are the most among 49 central banks tracked by Bloomberg.

The full impact of the yearlong monetary tightening has yet to be reflected in the inflation rate, the central bank said in minutes published today.

‘Cumulative’ Impact

“Given the impact of monetary policy on inflation is cumulative and happens with delays, the committee considers that a significant part of the response of prices to the current monetary tightening cycle will still materialize,” the central bank said.

Tombini said today that after temporary food price increases ease, inflation will slow to become “compatible with” the central bank’s target.

Swap rates rose yesterday after the national statistics agency reported that consumer prices rose 6.15 percent in the 12 months through March, the fastest pace since July. Food and beverage costs rose 1.92 percent from the prior month during the worst drought in a half-century. Annual inflation has exceeded the 4.5 percent target for more than three years.

To support the currency and limit import price increases, the central bank sold $198.5 million of foreign-exchange swaps today under a program announced in December. It also extended the maturity on contracts worth $494.6 million after resuming rollovers last week.

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