Finance Minister Guido Mantega said Brazil will do what it takes to fight inflation, adding that interest rate increases are an option to rein in consumer prices. Swap rates rose.
“The interest rate isn’t fixed. If you have more worrying inflation, it can move, but this is up to the central bank to decide,” Mantega said in an interview from Moscow today. “The government will do what it takes to keep inflation under control.”
Yields on swap rates maturing in January 2014, the most traded in Sao Paulo, rose to the highest level in more than four months as traders increased bets the central bank will have to raise the benchmark rate this year after cutting it to a record. Inflation, which has exceeded the 4.5 percent target in the past 29 months, quickened to 6.15 percent in January.
Mantega said the government won’t allow the currency to over-appreciate in a bid to rein in consumer prices after the currency strengthened to a nine-month high yesterday. A stronger currency helps tame inflation by making imports cheaper.
Yields on swap rates maturing in January 2014 rose 14 basis points, or 0.14 percentage point, to 7.53 percent at 11:07 a.m. local time. The real rose 0.1 percent to 1.9560 per U.S dollar.
Traders see a 50 percent chance of policy makers raising the Selic rate to 7.5 percent from 7.25 percent in April, Diego Donadio, Latin America strategist at Banco BNP Paribas Brasil SA, said in a telephone interview from Sao Paulo.
Brazil’s real appreciated 0.4 percent to 1.9582 per dollar at the close in Sao Paulo yesterday, the strongest level since May 10, on speculation the government would allow the currency to appreciate to contain inflation. A drop in U.S. jobless claims also fostered demand for emerging-market assets.
“We will not allow for an over-appreciation of the real,” Mantega said, adding that the government isn’t thinking of a specific level. “We won’t tolerate abnormal fluctuations.”
Speculation that Brazil was changing policy and seeking a stronger currency to help tame inflation started last month after the central bank surprised the markets with an intervention in swaps to prop up the real.
A stronger real may be used together with higher interest rates to slow inflation, said Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA.
“It would give the central bank more credibility,” Rostagno said in a telephone interview from Sao Paulo.
The real rallied to a level stronger than 2 per dollar on Jan. 28 for the first time since July after the central bank renewed $1.85 billion of currency swaps about to expire, refraining from buying dollars to settle the contracts. On Jan. 31, the government exempted foreigners from a tax on real-estate funds traded on the stock exchange, spurring speculation that inflows will help sustain the real.
“It is clear that the central bank does not want a very weak real,” Darwin Dib, chief economist at CM Capital Markets Asset Management, said by phone from Sao Paulo.
The central bank swung in 2012 between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond 2 per U.S. dollar.
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