Brazil’s Swap Rates Surge as Currency Stokes Inflation Concern

Brazil’s swap rates climbed the most since September on speculation the central bank will raise borrowing costs by as much as a full percentage point next month to control inflation with the real slumping to a nine-year low.

Swap rates, a gauge of expectations for changes in borrowing costs, rose 0.28 percentage point to 12.97 percent on the contract due in January 2017 at the close of trading in Sao Paulo. The currency fell for a fifth straight day, declining 1.6 percent to 2.7387 per U.S. dollar, the weakest since March 2005. The drop was the biggest among 31 major currencies tracked by Bloomberg after the Russian ruble.

The real pared its decline as central bank President Alexandre Tombini said daily foreign-exchange swap offerings supporting the currency will continue next year, ranging from $50 million to $200 million. The central bank began the intervention program in 2013 to limit import price increases as part of an effort to curb inflation.

“Tombini’s response wasn’t very energetic, which didn’t stop the dollar from rising,” Paulo Fernando Petrassi, a fixed-income manager at Leme Investimentos Ltda. in Florianopolis, Brazil, said by telephone. “The message was: I’ve got my eyes on it, I’m seeing what’s going on, but I can’t control things.”

One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, remained the highest among 16 major currencies.

The central bank last extended the program in June, saying it would continue to offer $200 million in currency swaps each business day through at least Dec. 31. Brazil sold the equivalent of $196.6 million of currency swaps today and rolled over contracts worth $488.8 million.

Swap ‘Parameters’

“In the coming days, the central bank will define the parameters of the daily currency swap auctions that will come into effect on Jan. 1, 2015,” Tombini told members of Congress today. “The parameters could be adjusted: at least 50, at the most 200” million dollars a day, he later told reporters when asked about the program.

Tombini told lawmakers that the real’s depreciation is part of a global phenomenon and that there are some benefits as the drop in the currency helps exporters and makes domestic tourism more attractive.

While policy makers raised the benchmark lending rate on Dec. 3 by a half-percentage point to 11.75 percent, they said in minutes published last week that additional changes in borrowing costs will probably be carried out with restraint as fiscal policy becomes tighter.

New Minister

President Dilma Rousseff has pledged to step up the fight against inflation in her second term. Last month she appointed as her new finance minister Joaquim Levy, who has promised to implement more rigorous fiscal policy.

“There is a perception that a bigger increase in borrowing costs will be necessary as a consequence of inflation pressures on the back of the real’s devaluation,” Camila Abdelmalack, an economist at CM Capital in Sao Paulo, said by telephone.

The real dropped today as concern the Federal Reserve will begin raising interest rates sooner than expected and as a decline in commodities led by crude oil discouraged demand for emerging-market assets.

The U.S. central bank meets today and tomorrow to review the timeframe for raising borrowing costs even as inflation remains below its 2 percent target.

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