Brazil’s Swap Rates Climb as Central Bank Tightening Is Forecast

Brazil’s swap rates increased to a two-week high as economists joined investors in projecting that the central bank will raise borrowing costs by a half-percentage point today to curb inflation.

Swap rates on the contract maturing in January 2017 rose five basis points, or 0.05 percentage point, to 12.47 percent at the close of trade in Sao Paulo, the highest level since Nov. 19. The real advanced 0.6 percent to 2.5532 per dollar.

President Dilma Rousseff pledged last week to carry out an “immense effort” to slow inflation after she appointed former Treasury Secretary Joaquim Levy as finance minister. The central bank will raise the target lending rate today to 11.75 percent from 11.25 percent, economists surveyed by Bloomberg and swap rates indicate.

“A stronger monetary tightening could bring greater credibility to the government’s argument in favor of an adjustment of the economy,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil SA in Sao Paulo, said in a telephone interview. “A higher rate could be a message in favor of tightening to bring inflation to the target center.”

Policy makers lifted borrowing costs on Oct. 29 by 25 basis points, saying the first increase since April was carried out to ensure a “benign outlook” for inflation.

Consumer prices rose 6.42 percent in the 12 months through mid-November, within the central bank’s preferred range of 2.5 percent to 6.5 percent.

‘Upper Limit’

“The most recent data shows inflation will finish the year within the target,” Rousseff told leaders of her Workers Party on Nov. 28. “This doesn’t mean we’re content with inflation at the upper limit of the target range. On the contrary, we’re going to do an immense effort to reduce inflation.”

Inflation may slow to the 4.5 percent midpoint of the preferred range in 2017, Itau Unibanco Chief Economist Ilan Goldfajn said in Sao Paulo.

To support the currency, Brazil sold the equivalent of $198.3 million of foreign-exchange swaps today as part of an intervention program begun last year and rolled over contracts worth $489.8 million.

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