Brazil Real Posts Weekly Drop as China Offsets Inflation Efforts

Updated on

Brazil’s real posted its first weekly drop in June as a Chinese stock rout offset the central bank’s efforts to boost confidence in Latin America’s largest economy.

A Morgan Stanley report saying stocks in China, the nation’s top trading partner, are expensive spurred a decline in emerging-market equities and currencies. That helped temper optimism with the Brazilian government’s decision to narrow its target range for inflation for the first time since 2006, a move that lowered the top threshold for acceptable levels of price increases.

“Investors prefer unwinding risky positions before the weekend,” Ipek Ozkardeskaya, an analyst at London Capital Group, said by e-mail. “In Brazil, the inflation decision delivers a clear message: The central bank is not even thinking about missing the current target. This shows the confidence it has on its policy.”

The real dropped 0.1 percent to 3.1293 per dollar at the close of trade in Sao Paulo, extending this week’s slide to 1 percent. Swap rates due in January 2017 lost 0.01 percentage point to 14.05 percent.

Brazil has increased its benchmark interest rate at six consecutive meetings to tame inflation, making it the only member of the Group of 20 nations to lift borrowing costs this year. The annual inflation rate was 8.47 percent in May, and has exceeded the 4.5 percent mid-point of the central bank’s target for almost five years.

The inflation target for 2017 will be 4.5 percent with a tolerance range of 1.5 percentage points above or below that, the monetary council decided Thursday. The nation set the current target range of 2.5 percent to 6.5 percent in 2006.

Restoring Credibility

Brazil’s central bank is working to restore the credibility of the institution, and the change in the inflation target is a signal of that, Marcelo Carvalho, chief economist for Latin America at BNP Paribas SA said in a conference call with journalists. The bank forecasts inflation at 9 percent for 2015.

In a sign of reduced concern over the currency’s fluctuations, the central bank extended the maturity on 5,200 foreign-exchange swap contracts Friday, down from 6,300 earlier this month and 8,100 in May.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE