Bloomberg News

Brazil Swap Rates Rise on View Tax Cut to Fall Short; Real Gains

April 01, 2013

Brazil’s swap rates rose to a one- week high on speculation renewed tax breaks for vehicles will fail to contain inflation, spurring the central bank to increase borrowing costs.

Swap rates on the contract due in January 2015 climbed four basis points, or 0.04 percentage point, to 8.53 percent at 10:09 a.m. in Sao Paulo, the highest level on a closing basis since March 21. The real appreciated 0.1 percent to 2.0209 per U.S. dollar.

The Finance Ministry said March 30 that it would extend a reduction of the so-called IPI tax on vehicles to December. It was set to expire today. The central bank said last week that inflation has spread, boosting the probability that price increases will breach the upper limit of the target range for the first time in a decade.

“What’s reverberating in the market is this extension of the IPI tax for the automotive sector,” Jayro Rezende, the head of the derivatives desk at CGD Investimentos in Sao Paulo, said in a telephone interview.

Policy makers estimate there is a 25 percent chance inflation will exceed 6.5 percent this year even under a scenario in which they raise the benchmark interest rate to 8 percent from a record low 7.25 percent, according to the quarterly inflation report published last week. In December, they saw a 14 percent chance of breaching the inflation ceiling. They reduced the 2013 economic growth forecast to 3.1 percent from 3.3 percent.

To contact the reporter on this story: Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net

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


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