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Brazil to extend currency intervention to boost real
June 07, 2014 , 8 : 39 pm GST
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The central bank has been selling swap contracts since August to provide currency hedge to investors in an effort that has helped the real gain more than any other major currency in the past six months. Photo - Supplied
Brazil's central bank will extend its currency intervention programme as the government tries to support the real in an effort to fight above-target inflation.
The central bank has been selling swap contracts since August to provide currency hedge to investors in an effort that has helped the real gain more than any other major currency in the past six months. The programme was scheduled to end on June 30. Details of extension will be provided in due time, the central bank said in a statement on its website.
A weaker real could further stoke inflation that the central bank says has a 40 per cent chance of accelerating beyond the 6.5 per cent upper limit of the target range this year.
Growth and inflation
The central bank last week halted the world's longest tightening cycle as President Dilma Rousseff's administration struggles to tame consumer prices without further jeopardising growth.
"In the short term, the overriding concern is inflation, which is already a major economic problem and an increasing political liability," Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said by phone. "Their preference is having the exchange rate below 2.30 to 2.35 until the elections."
Brazil has acted to support the currency and limit increases in the price of imported goods under a programme first announced in August and later extended. The plan was implemented after the United States Federal Reserve indicated it was preparing to reduce the amount of money pumped into the world economy.
The real weakened more than any of its emerging-market peers after central bank President Alexandre Tombini on May 22 said there had been a 'certain drop in demand' for currency swaps.
The comment was interpreted as a sign policy makers were considering scaling down or ending the programme.
The currency fell on June 3 to its lowest close since March 26 on renewed speculation the central bank would unwind its intervention plan. The real strengthened 0.7 per cent to 2.2473 per US dollar, extending its six-month gain to 3.8 per cent.
Central bankers on May 28 decided to hold the benchmark Selic unchanged at 11 per cent after increasing borrowing costs by 375 basis points during nine previous meetings to combat inflation. In an accompanying statement, policy makers said they decided 'at this moment' not to move the key rate.
Brazil's consumer prices as measured by the benchmark IPCA index rose 0.46 per cent in May from the month prior, above economists' forecast of a 0.38 per cent increase. The pace of annual inflation quickened to 6.37 per cent from 6.28 per cent the month prior, marking the fastest rate since June.
Brazil's central bank targets annual inflation at 4.5 per cent, plus or minus two percentage points.
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