Brazil Real Intervention Out of Sync With Slowdown, IMF Says

The International Monetary Fund said Brazilian central bank President Alexandre Tombini shouldn’t shore up the real as Latin America’s largest economy stalls and inflation accelerates.

Adjusting for inflation, Brazil’s currency was 5 percent to 15 percent stronger than “implied by fundamentals and desirable policies” in 2013, IMF economists wrote in a research report published today. The real has appreciated 5.9 percent this year against the dollar while inflation accelerated to a 13-month high and economic growth slowed.

The central bank said last month it was extending through the end of 2014 a currency intervention program aimed at helping to boost the real and curb prices for imports. After nine consecutive increases in the target lending rate, policy makers held it at 11 percent on July 16 for a second straight meeting. The central bank didn’t return phone and e-mail messages seeking comment today.

Currency intervention is useful for calming sudden shifts in capital flows “but should not be used to resist currency pressures that reflect changes in fundamentals,” the IMF economists wrote.

The central bank has taken the right measures to slow inflation and protect Brazil’s currency from the impact of reduced monetary stimulus in the U.S., Finance Minister Guido Mantega said today when asked about the IMF report.

‘The Turbulence’

“Brazil is solid from the point of view of its exchange rate,” Mantega told reporters in Brasilia. “We were able to get through the turbulence caused by the Fed.”

To support the real, Brazil sold $198.7 million of currency swaps today and rolled over contracts worth $345.8 million. The central bank plans to keep offering $200 million in swaps each business day at least through the end of the year.

In Mexico,“there is no reason to alter the current and planned policy settings,” according to the IMF. Mexico’s monetary policy uses interest rates to bring inflation in line with its target.

While the Mexican peso was about 6 percent undervalued last year, it remains in a range consistent with economic fundamentals, according to the IMF note.

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