Brazil's Real Surges As Central Bank Says Inflation Rate Is High

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Brazil’s Real Surges as Central Bank Says Inflation Rate Is High
By Blake Schmidt & Marisa Castellani - Feb 7, 2013 3:33 PM ET
Brazil’s real rallied the most among emerging-market currencies as the central bank said high inflation requires attention, spurring speculation that policy makers will let the currency strengthen to contain prices.
Swap rates climbed after the government reported that consumer prices increased in January at the fastest pace in almost eight years, adding to bets on a boost in borrowing costs. The exchange rate and tax cuts will help slow inflation, a central bank board member said in a phone interview, asking not to be identified because of internal policy.
“Higher inflation shoots the real up,” Joao Paulo de Gracia Correa, currency manager at Correparti Corretora, said in a phone interview from Curitiba, Brazil.
The real appreciated 1.2 percent to 1.9667 per dollar at the close in Sao Paulo, the strongest level since May. The rally was the biggest among 25 emerging-market currencies tracked by Bloomberg. Swap rates due in January 2015 increased 10 basis points, or 0.10 percentage point, to 8.19 percent, the highest level since Oct. 2.
The Treasury rejected all bids in its auction of LTN bonds due in April 2014, April 2015 and July 2016 after the surge in swap rates. It sold 5.5 billion reais of floating-rate LFT bonds due in 2018.
Swap rates climbed as the national statistics agency reported that the IPCA consumer price index increased 0.86 percent in January from a month earlier, the most since April 2005. The median forecast of 41 economists surveyed by Bloomberg was for a 0.83 percent advance. Annual inflation accelerated to 6.15 percent, faster than the 4.5 percent midpoint of the central bank’s target range for a 29th month.
Inflation Outlook
Inflation is getting worse in the “short term,” the central bank said in the minutes of its meeting Jan. 15-16. The board held the Selic target lending rate at a record low 7.25 percent for a second straight time after the slowest two years of economic expansion in a decade.
Policy makers have cut benchmark borrowing costs by 5.25 percentage points since August 2011, the most aggressive cuts among Group of 20 nations.
The government plans to scrap federal taxes on food staples to control inflation, President Dilma Rousseff said Feb. 5. It made deeper reductions in consumer and industry energy costs last month than previously announced.
‘More Tax Cuts’
“We expect the government to eventually announce more tax cuts to face increasingly worrying inflation,” Enestor Dos Santos, an economist at BBVA in Madrid, said in an e-mailed report. “We expect tools other than the Selic to be used to try to maintain inflation under control, which means an additional appreciation of the exchange rate and/or a reduction in public expenditure should not be ruled out.”
The real rallied to a level stronger than 2 per U.S. 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.
Policy makers 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 dollar.

Brazil is now the world’s sixth biggest economy. The country has the biggest economic potential among the Latin American countries. One of the major industries in the country is manufacturing industry. The Brazilian currency is the real (BRL, R$). Its rate is established during the U.S. trading session. It is considered to be one of the most stable currencies in the world. Central bank of Brazil implements strict monetary policy aimed at maintenance of high
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