Brazil’s central bank may extend into 2014 a program of currency swaps and credit line auctions as analysts forecast the real will depreciate this year on signals the U.S. will wind down its monetary stimulus.
“The program has proved successful in curbing volatility and could be extended beyond year end if necessary,” central bank President Alexandre Tombini said about the currency intervention in prepared remarks for an Oct. 12 speech before the International Monetary and Financial Committee.
The central bank said Aug. 22 it would carry out currency swap auctions of $500 million a day on Mondays, Tuesdays, Wednesdays and Thursdays, as well as credit line auctions of $1 billion a day on Fridays. The $60 billion program was scheduled to run through Dec. 31.
The real, which weakened to almost a five-year low before the intervention started, has gained 12 percent since Aug. 22, the best performance among global currencies tracked by Bloomberg. The real rose for a fourth straight day and gained 0.1 percent to 2.1744 per dollar at 9:10 a.m. local time.
The real will weaken to 2.3 a dollar by the end of 2013, according to analysts polled on Oct. 4 by the central bank.
The seven major Latin American currencies tracked by Bloomberg have depreciated this year as investors exit emerging markets in anticipation of a U.S. Federal Reserve decision to curtail monetary stimulus. Most U.S. policy makers said the central bank was likely to reduce the pace of bond purchases this year, according to minutes of the September meeting released last week.
“This is a message designed to avert panic among segments that require hedging,” Jankiel Santos, chief economist at Banco Espirito Santo, said by phone about Tombini’s speech.
Brazil’s government doesn’t have a specific target for the exchange rate, former Deputy Finance Minister Nelson Barbosa said in a report presented at the International Monetary Fund’s annual meetings last week by the Woodrow Wilson International Center for Scholars.
“The government will intervene in the market but it has no commitment with a specific value of the exchange rate,” he wrote. “It intervenes to reduce volatility.”
The central bank board also is using monetary policy to ensure a weaker real doesn’t fan inflation, Tombini said in the transcript of his speech, which was posted in English on the central bank website Oct. 11. Policy makers have raised the benchmark Selic rate in the past five meetings to 9.5 percent.
“Monetary policy responded firmly to inflationary pressures since the beginning of 2013, first through communication and then raising the policy rate since April,” according to the speech. “Monetary policy is contributing to making inflation retreat and limiting FX pass-through.”
Annual inflation slowed to 5.86 percent in September from 6.09 percent the prior month. Policy makers target 4.5 percent inflation, plus or minus two percentage points.
Tombini’s speech was on behalf of Brazil, Cape Verde, Dominican Republic, Ecuador, Guyana, Haiti, Nicaragua, Panama, Suriname, Timor-Leste and Trinidad and Tobago.