Brazil’s real declined the most among major currencies as concern the nation’s fiscal deterioration will lead to a credit rating cut made the currency less attractive to investors.
The real depreciated 0.8 percent to 2.3360 per dollar at the close in Sao Paulo and lost 4.1 percent in November, its biggest monthly decline since August. Swap rates on contracts maturing in January 2015 climbed three basis points, or 0.03 percentage point, to 10.66 percent, extending their monthly increase to nine basis points.
The government budget deficit expanded to 3.4 percent of gross domestic product in October, the widest since 2009, according to central bank data published today. Government spending has helped annual inflation stay above policy makers’ target for more than three years.
“Spending is rising, and investment isn’t,” Flavio Serrano, senior economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a telephone interview. “The central bank has been arguing that the government’s fiscal policy is moving toward neutral, but it seems to be going in the opposite direction.”
Brazil’s nominal budget deficit was wider than economists predicted in October and set a record for the month. The budget gap in October narrowed to 11.5 billion reais ($5 billion) from 22.9 billion reais a month earlier. The median forecast from five analysts surveyed by Bloomberg was for a shortfall of 10.7 billion reais.
Carlos Hamilton, the central bank’s economic policy director, said at an event in Fortaleza, Brazil, on Nov. 6 that neutral fiscal policy can be achieved by 2015.
To support the real and curb import price increases, Brazil auctioned foreign-exchange credit lines today as part of a $60 billion intervention program announced in August.
Inflation accelerated to 5.78 percent in the 12 months through mid-November, more than a full percentage point above the central bank’s target of 4.5 percent, the national statistics agency reported Nov. 19.
Policy makers have raised benchmark borrowing costs from a record low 7.25 percent to 10 percent this year to cool consumer demand and hold down prices. The rate increases have been the biggest among 49 central banks tracked by Bloomberg.
While the central bank raised the target lending rate this week by a half-percentage point, it omitted from its statement language used in previous communiques to signal that more increases of that size are needed to curb inflation.