Bloomberg News

Brazil Swap Rates Rise as Bank Cites Inflation; Real Strengthens

January 17, 2013

Brazil’s swap rates climbed to a one-week high after the central bank signaled no plans to cut borrowing costs as inflation hovers above policy makers’ target.

Swap rates on the contract due in January 2015 rose two basis points, or 0.02 percentage point, to 7.78 percent at 12:14 p.m. in Sao Paulo, the highest on a closing basis since Jan. 8. The real appreciated 0.1 percent to 2.0398 per U.S. dollar.

The central bank left the target lending rate at a record low 7.25 percent yesterday after reducing it 5.25 percentage points through October. The balance of risks for inflation worsened in the short term as the domestic recovery was “less intense” than expected, the policy committee, said in its statement.

“The central bank is attuned to the risks,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA in Sao Paulo, said in a phone interview. “If inflation continues deteriorating, they could begin to prepare for a rate increase.”

Prices in Brazil’s biggest city rose 0.96 percent in the month through the first half of January, the Foundation Economics Research Institute in Sao Paulo said today. That exceeded the 0.91 percent median estimate of 22 economists surveyed by Bloomberg.

Inflation in December exceeded economists’ estimates for the sixth straight month and ended 2012 at 5.84 percent, higher than the bank’s 4.5 percent target for the third straight year.

Swap contracts maturing in July 2014 or later rose while earlier contracts fell, a reflection of the central bank’s concern with stimulating growth, said Joao Junior, a fixed- income trader at ICAP do Brasil CTVM in Sao Paulo.

Inflation Watch

“The central bank showed it’s watching inflation, but at the same time it said economic activity is weaker than expected,” Junior said in a telephone interview. “They want to say that they’re not going to cut again, but they’re also not going to hike to contain inflation expectations.”

Policy makers forecast the world’s biggest emerging market after China expanded 1 percent in 2012 or about half the pace of the U.S and Japan, according to Bloomberg surveys.

Tombini ended the steepest rate-cutting cycle among Group of 20 nations in November after a jump in food prices fanned inflation.

To contact the reporters on this story: Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net; Patricia Lara in Sao Paulo at plara6@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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