Brazil’s Real Leads Major Currency Gains on Central Bank Outlook
By Paula Sambo/Bloomberg
10:20 AM BRT
May 7, 2015
Brazil’s real led gains among major currencies and swap rates rose on speculation the central bank will keep raising borrowing costs until analysts forecast that inflation will slow to the official target.
Expectations that the central bank will reduce borrowing costs by early 2016 are premature, said a person close to the government’s economic team who asked not to be identified because the information isn’t public. Traders project that policy makers will increase the benchmark Selic rate by another half-percentage point in June after saying in minutes of its meeting last week that the balance of inflation risks has become unfavorable.
“We’re going to continue to see more Selic hikes, at the next meeting, and potentially even beyond that, as long as it takes to convince the market,” Alvaro Vivanco, a Latin America strategist at Banco Bilbao Vizcaya Argentaria SA, said in an interview in New York. “Brazil has been trying to get the market’s confidence back, and it’s not there quite yet.”
Swap rates, a gauge of expectations for Brazil’s borrowing costs, rose 13 basis points, or 0.13 percentage point, to 13.63 percent on the contract maturing in January 2017 at 3:55 p.m. in Sao Paulo, the highest level since March 19. The real gained for a third straight day, appreciating 0.5 percent to 3.0205 per U.S. dollar. The increase was the biggest among 16 major currencies tracked by Bloomberg.
Brazil Policy
The central bank board voted unanimously last week to lift the benchmark interest rate to 13.25 percent as inflation accelerated. After four consecutive raises of 50 basis points and an increase of a quarter-percentage point, borrowing costs are the highest since January 2009.
A government report due Friday is forecast by analysts surveyed by Bloomberg to show that consumer prices rose 8.23 percent in the 12 months through April after the prior increase of 8.13 percent. The preferred range for inflation is 2.5 percent to 6.5 percent.
“It seems very clear that more hikes are going to come,” Christian Lawrence, a trader at Rabobank in New York, said in an e-mailed response to questions.
Finance Minister Joaquim Levy’s effort to shore up public accounts got a boost when the lower house approved reductions of labor benefits. The vote is the first big test of President Dilma Rousseff’s ability to push austerity through Congress.
While Standard & Poor’s reaffirmed in March the country’s investment-grade rating, Moody’s Investors Services has cut its outlook to negative.
The local currency tumbled 2.3 percent Monday as the central bank began the week rolling over fewer swaps supporting the currency after sales halted in March. It extended the maturity on $394.3 million worth of contracts Thursday.
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