Brazil Central Bank Halves Currency Intervention in New Year

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Brazil’s central bank is cutting in half a currency intervention program that is designed to buoy the real as part of its fight against above-target inflation.

The central bank on Jan. 2 will start holding foreign-exchange swap auctions from Monday to Friday until at least March 31, offering as much as $100 million a day, it said in a statement posted on its website after business hours today. That’s smaller than the current program of $200 million a day.

President Dilma Rousseff is struggling to contain surging consumer prices without hampering the economic recovery. While benefiting some exporters, the real’s depreciation this year has elevated the price of imports and partially offset central bank efforts to tame inflation through steeper interest rates. Reducing the size of the intervention probably is designed to keep the real around current levels, said Reginaldo Siaca, a foreign-exchange manager at Tov Corretora de Cambio.

“The reduction in the program will pressure the real in the short term,” Siaca said by telephone from Sao Paulo. “I don’t think the real will weaken much further in the medium term though. The current level is quite positive.”

The real strengthened by 1.8 percent to 2.6576 per U.S. dollar at the market’s close earlier today, curtailing this year’s depreciation to 11 percent. Swap rates on the contract due in January 2017, the most traded in Sao Paulo, fell eight basis points, or 0.08 percentage point, to 12.90 percent.

Provide Hedging

The new measures are designed to provide hedging and inject liquidity in the foreign exchange market, the central bank said in the statement. Policy makers said they are prepared to provide additional dollars if needed.

The central bank in August 2013 implemented the intervention program after the real hit almost a five-year low on indications the U.S. Federal Reserve was preparing to taper its monetary stimulus. Brazil said in June this year it would extend the measures through at least Dec. 31, offering $200 million each business day in currency swaps.

The program hasn’t contained consumer prices, as inflation exceeded the 2.5 percent to 6.5 percent target range in the past four months. Two-year breakeven inflation rates, based on the gap in yields of inflation-linked bonds and interest-rate swaps, have increased 0.11 percentage points to 7.22 percent this month.

‘Fiscal Adjustment’

Rousseff is pledging to implement more rigorous fiscal policy to shrink the deficit and slow consumer price increases in her second term, which starts Jan. 1. Her government this month has raised interest rates for loans granted by the state development bank BNDES and cut pension and employment benefits.

“The economy needs more than ever a significant structural and permanent fiscal adjustment” and “less intervention in the FX market,” Alberto Ramos, the chief Latin America economist at Goldman Sachs Group Inc., wrote in a research note today. Fiscal austerity would “endow the central bank extra degrees of freedom to calibrate interest rate policy.”

Policy makers increased benchmark lending rates in their last two meetings, saying in October the move was designed to ensure a more “benign” outlook on inflation. Brazil has the highest key rate since 2011.

The increased cost of living has eroded consumer confidence, which in November fell to its lowest level since 2008, according to data published by the Getulio Vargas Foundation, a Brazilian research group and business school.

Gross domestic product expanded 0.1 percent in the third quarter following a contraction in the first half of the year. Economists surveyed by Bloomberg see Latin America’s largest economy growing 0.2 percent this year, which would be the worst performance since 2009.