Brazil’s Swaps Soar as Inflation Grips Economy
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Brazil’s swap rates soared recently as an official report showing over-achieved inflation levels and the announcement of an increase in fuel prices. These developments have fuelled speculation that the country’s central bank will continue to increase borrowing costs in the coming weeks by a half-percentage point in a bid to curb rising inflation.
Brazil’s own short-term swap rates rose for the first time in five days as both analysts and investors predicted that the central bank would again increase borrowing costs.
Brazil’s swap rates soared recently as an official report showing over-achieved inflation levels and the announcement of an increase in fuel prices. These developments have fuelled speculation that the country’s central bank will continue to increase borrowing costs in the coming weeks by a half-percentage point in a bid to curb rising inflation.
Brazil’s own short-term swap rates rose for the first time in five days as both analysts and investors predicted that the central bank would again increase borrowing costs.
On the contracts maturing in January 2016, Swap rates climbed roughly 0.11 percentage point to 12.67% at the close of trading at the Bovespa Stock Exchange in Sao Paulo. Joao Paulo de Gracia Correa, a seasoned trader at Correparti Corretora de Cambio in Curitiba, Brazil, had earlier said that a potential rate hike would be a leading factor.
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Interest Rates Adjustments
Financial analysts that are keeping a close watch on the economy raised their outlook for annual inflation for the third time in as many weeks. The increase moved to 6.67% from an earlier 6.60%, according to a survey by the central bank. This estimate keeps the rate of inflation much faster than the official preferred target of 4.5%. In a telephone interview, a senior economist at Banco Espirito Santo de Investimento SA in Sao Paulo stated that inflation was still within the upper limit.
The analysts in the same central bank survey, conducted last week and published on Monday, had shown a lower median forecast for gross domestic product expansion to 0.38% from 0.40%.
Lending Rates
Policy makers had earlier unexpectedly raised their target lending rates in October 2014. The increase was almost a quarter-percentage point to 11.5% and came just three days after President Dilma Rousseff’s election. Consequently, policy makers lifted the target lending rate to 12.25% from 11.75% again on January 21.
Troubled times
The world’s seventh largest economy is experiencing stagnant growth coupled with a widening budget deficit. This prompted bond credit rating institutions like Moody’s Investors Services to change Brazil’s credit outlook to negative in September 2014. The company has rated the nation at Baa2, just two levels above junk.
Brazil’s credit rating fell for the second time in just a year to the lowest level of investment grade in the past decade. Last Monday, Brazil sold the equivalent of almost $100 million worth of currency swaps and rolled over multiple contracts totaling a massive $489 million, in order to support the Brazilian real and limit an increase in import prices.
Elsewhere, electricity rates expect to climb at a faster pace in 2015 as the Brazilian government would be ending its subsidies, as stated by the Finance Minister, Joaquim Levy.
Trying to do too much
Brazil experienced violence and invited controversy by building the World Cup stadiums. They will now host the Olympics and that has many people scratching their heads since they believe that Brazil perhaps is trying to do too much. The one positive thing about Brazil is that it is energy sufficient, which America still is not despite states like Texas, Pennsylvania, North Dakota, and Oklahoma trying to make it so.
