Brazil Real Advances After Petrobras Moves to Raise Fuel Prices

  • Higher fuel costs could add to inflation, prompt rate increase
  • Real's volatility is the highest in emerging markets

Brazil’s real led gains amid major currencies as the state-controlled oil company said it would raise fuel prices, signaling that policy makers may need to lift interest rates further to combat inflation.

One-month implied volatility was the highest in emerging markets as the currency advanced 2.9 percent to 3.9475 per dollar in Sao Paulo, its first back-to-back gain in three weeks. The real, which reached a record low last week, joined a rally in currencies from developing nations as a surge in Chinese shares and a gain in commodity prices helped spur appetite for riskier assets.

Petroleo Brasileiro SA raised prices for gasoline and diesel for the first time in almost a year to help offset the impact of lower oil prices and the weaker real, which has plummeted 21 percent this quarter, the most among major currencies. The move will add to inflation already running at about twice the official target, which could prompt policy makers to raise borrowing costs in a bid to mute consumer-price increases even as the country heads to its longest recession since the 1930s.

"Rising oil prices will definitely enhance the overheating of inflation in Brazil and could” result in higher interest rates, said Ipek Ozkardeskaya, a markets analyst at London Capital Group Ltd. "But the contraction in economic activity is what keeps the central bank stuck in the middle."

The real has plummeted this year on concern that the country will see further reductions to its credit ratings. Standard & Poor’s cut the nation to junk earlier this month because of President Dilma Rousseff’s inability to push through measures that would shore up the budget. Amid calls for her impeachment, she’s struggling to find support for her policies among lawmakers as her popularity hovers at record lows.

A cabinet shuffle to be announced Thursday by Rousseff “will help the president to consolidate the support she would need in Congress to stave off any impeachment proceedings,” Eurasia analysts wrote in a report Wednesday.

Lawmakers may vote Wednesday on attempts to override Rousseff’s vetoes of measures that would boost spending on pensions and salaries by a combined 63 billion reais over four years, frustrating her efforts to shore up the budget. Rousseff’s popularity is at an all-time low of 14 percent according to a CNI/Ibope poll released in Brasilia on Wednesday. The survey of 2,002 people was carried out Sept. 18-21 in 140 municipalities, with a margin of error of 2 percentage points.

Brazil’s central bank will consider a marginal increase in interest rates if the government fails to shore up fiscal accounts, according to a member of Rousseff’s economic team who asked not to be identified because the information is private.

Brazil’s primary budget gap narrowed to 7.3 billion reais ($1.8 billion) in August from 10 billion reais in July, according to data released Wednesday. Economists surveyed by Bloomberg had estimated a deficit of 11 billion reais.

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