Brazil's Real Gains to a 9-Year High on Interest-Rate Increase

July 24
Brazil's real rose to a nine-year high after the central bank increased its benchmark interest rate to a higher-than-forecast 13 percent yesterday.
The real advanced 0.4 percent to 1.5767 per dollar at 3:34 p.m. New York time, after most trading in Brazil had ended, from 1.5836 yesterday. The currency reached 1.5732 today, the strongest since 1999. It has gained 12.9 percent this year, the biggest advance against the dollar among 16 most-actively traded currencies, as the second-highest, inflation-adjusted interest rate in the world lures investors to the fixed-income market.
Brazil's real interest rate, or the benchmark 13 percent rate minus annual inflation of 6.06 percent, is 6.94 percent. Turkey has the world's highest so-called real interest rate at 7.55 percent.
The central bank signaled it may be ready to accelerate the pace of rate increases after raising the Selic rate more than economists forecast for a second time in three meetings.
"We got it wrong, again", said Guilherme da Nobrega, chief economist at Itau Corretora in Sao Paulo. He had forecast a 50-basis-point increase to 12.75 percent. "Our difficultly in accurately predicting what the central bank is doing shows the scenario is very complex, with a lot of uncertainty about the outlook for inflation."
Central bank President Henrique Meirelles and bank directors raised the overnight rate by three-quarters of a percentage point to 13 percent. Thirty-one of 45 economists surveyed by Bloomberg predicted a half-point increase.

Accelerating Inflation
Inflation will accelerate to 6.53 percent this year, above the top end of the central bank's target, according to a weekly central bank survey published this week. Consumer prices rose 6.06 percent in the 12 months through June, the fastest in 2 1/2 years.
"Price pressures remain strong, and so the central bank may remain on a 75 basis-point per meeting tightening path, which is very positive for the real," Win Thin, a New York- based currency strategist at Brown Brothers Harriman & Co., wrote in an e-mailed note to clients today.
The yield on Brazil's interest-rate futures contract for January 2009 delivery jumped 17 basis points to 13.7 percent, adjusting to the increase in the central bank's benchmark rate.
The yield on the government's zero-coupon bonds due in January 2010 fell 5 basis points to 14.9 percent after rising as much as 8 basis points earlier to 15.03 percent, according to Banco Votorantim.
Source: http://www.bloomberg.com/apps/news?pid=20601086&sid=azm_LSkunAEg&refer=latin_america