Brazilian Swap Rates Fall After Slower-Than-Forecast Inflation

Brazil’s swap rates declined to a one-month low as slower-than-forecast inflation added to speculation that the central bank will limit increases in borrowing costs.

Swap rates on the contract maturing in January 2017 dropped 0.13 percentage point to 12.98 percent at the close of trading in Sao Paulo, the lowest level on a closing basis since March 3. The real advanced 2.3 percent to 3.0595 per U.S. dollar, the biggest gain among 16 major currencies tracked by Bloomberg, as the government and lawmakers signed an agreement to work together to narrow the budget deficit.

Consumer prices rose 8.13 percent in March from a year earlier, slower than the 8.2 percent median forecast of economists surveyed by Bloomberg. While the annual inflation rate was higher than in the prior month, central bank President Alexandre Tombini told lawmakers March 24 that prices would start to slow in April.

“Inflation coming below expectations gives some relief in the very short term,” Reginaldo Siaca, a currency manager at Tov Corretora de Cambio in Sao Paulo, said in a telephone interview. “Yet policy makers will need to remain vigilant in the next months.”

To slow inflation, Brazil has raised the target lending rate by 1.75 percentage points since the October election to a six-year high of 12.75 percent. Economists surveyed by the central bank forecast that policy makers will increase the benchmark by another half-percentage point this year.

Fed Outlook

The real remained higher Wednesday as minutes of the Fed’s March meeting indicated that some officials argued that policy makers should delay raising interest rates until later in the year, supporting higher-yielding assets from emerging markets.

Brazil’s currency is still down 13 percent this year as the economy stalled, inflation remained above target, President Dilma Rousseff’s budget measures faced opposition in Congress and allegations of corruption at the state-controlled oil company drew street protests.

“From a political standpoint, a lot of pressure has been put on Rousseff as prices spiraled out of control, highlighting the lack of control the current government has,” Peter Rosenstreich, the head of market strategy at Swissquote Bank SA in Gland, Switzerland, said by e-mail.

Party leaders in Brazil’s ruling coalition signed an agreement to back the government’s plan to narrow the budget deficit after Vice President Michel Temer took over negotiations with lawmakers on Wednesday. The currency extended gains after the announcement of the agreement.

They also vowed to avoid bills that reduce revenues or increase spending.

The president needs support from her allies, including Temer’s Brazilian Democratic Movement Party, or PMDB, to win congressional approval of tax increases and social benefit cuts.

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