Brazil’s Currency Intervention to Be Extended to Boost the Real

Brazil’s central bank will extend its currency intervention program 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 program was scheduled to end June 30. Details of extension will be provided in due time, the central bank said in a statement on its website yesterday.

A weaker real could further stoke inflation that the central bank says has a 40 percent chance of accelerating beyond the 6.5 percent upper limit of the target range this year. 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 jeopardizing 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.”

Tombini Comments

Brazil has acted to support the currency and limit increases in the price of imported goods under a program first announced in August and later extended. The plan was implemented after the U.S. 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 program.

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 percent to 2.2473 per U.S. dollar yesterday, extending its six-month gain to 3.8 percent.

Consumer Prices

Central bankers on May 28 decided to hold the benchmark Selic unchanged at 11 percent 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 percent in May from the month prior, above economists’ forecast of a 0.38 percent increase. The pace of annual inflation quickened to 6.37 percent from 6.28 percent the month prior, marking the fastest rate since June. Brazil’s central bank targets annual inflation at 4.5 percent, plus or minus two percentage points.

The economy expanded 0.2 percent in the first quarter, down from a revised 0.4 percent expansion recorded during the last three months of 2013. While agriculture increased 3.6 percent on the quarter, investment fell 2.1 percent.

Economists polled weekly by the central bank expect inflation to accelerate to 6.47 percent by year end as the real weakens to 2.40 per U.S. dollar. They also cut their 2014 growth expectation to 1.50 percent, the lowest ever, according to the survey published June 2.

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