Brazil Central Bank Said to Consider Real Weakened Too Much

Brazil’s central bank considers that the real has weakened to a level that doesn’t correspond to the country’s economic fundamentals, said a central bank official with knowledge of the discussions. The real extended gains.

Policy makers believe the currency has declined too much as traders wrongly bet that the government is working to keep the exchange rate within a determined range, said the official, who requested anonymity because he’s not authorized to discuss the matter publicly.

The government in the past two days dropped some capital controls, helping buoy the real after it tumbled to a three-year low on Nov. 30. The central bank on Dec. 3 also sold $2.1 billion in currency swaps and offered dollars with repurchase agreements in a bid to boost liquidity. Mantega said the government may further unwind capital controls as markets adjust to measures taken today and yesterday.

The real rose 1.5 percent to 2.0879 per U.S. dollar at the close in Sao Paulo, the biggest advance since June 29. Still, the real has weakened 10.6 percent since the beginning of the year, the worst performance amid the 16 most traded currencies tracked by Bloomberg.

A steeper slide compared to other emerging market currencies means that the real has weakened too much, the official said.

On Nov. 30, the currency tumbled 1.8 percent to 2.1360 per dollar, the biggest one-day decline since June 21 on speculation the government would allow the currency to further weaken to help boost economic growth by protecting local manufacturers from foreign rivals.

“Apparently they would like a weaker currency, but then they realized it could bring more problems than benefit,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said in an emailed interview. “They decided to put the flame out.”

A weaker currency could further fuel inflation, which has been above the central bank’s 4.5 percent target for more than two years, Santos said. Inflation quickened to 5.45 percent in October, up from 5.28 percent in September.

Brazil’s economy expanded 0.6 percent in the third quarter, the national statistics agency said Nov. 30, as government stimulus efforts failed to revive investment that fell for the fifth straight quarter.

Growth was lower than the forecasts of all 54 economists surveyed by Bloomberg whose median estimate was for 1.2 percent expansion.

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