Brazil central bank launches $60 billion currency intervention

Thu Aug 22, 2013 9:51pm EDT
 
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SAO PAULO (Reuters) - Brazil's central bank announced a currency-intervention program on Thursday that will provide $60 billion worth of cash and insurance to the foreign-exchange market by year-end, a move aimed at bolstering the country's currency, the real, as it slips to near five-year lows against the dollar.

The bank said in a statement it will sell, on Mondays through Thursdays, $500 million worth of currency swaps, derivative contracts designed to provide investors with insurance against a weaker real. On Fridays, it will offer $1 billion on the spot market through repurchase agreements.

Both are designed to prevent companies and individuals with dollar obligations from scrambling to the market at the same time, afraid that waiting will force them to pay more to buy dollars. When that happens, the real tends to weaken further and faster.

"This shows the firm determination of monetary authorities to keep the exchange rate from slipping further," said Andre Perfeito, chief economist with Gradual Investments in São Paulo.

The program starts on Friday and runs until December, the central bank said, adding it may announce additional auctions if it sees fit.

The move comes as the government seeks ways to control inflation and keep the real from sliding while at the same time trying to kick-start an economy that has stagnated despite a rapid expansion of credit. While a weaker real can help Brazil's export of commodities and manufactured goods, it makes raw materials and other imports more expensive, helping drive inflation higher.

Brazil cut its outlook for gross domestic product (GDP) growth to 2.5 percent from 3 percent in 2013 and to 4 percent from 4.5 percent for 2014, Finance Minister Guido Mantega said in an interview with Brazil's Globo Television Network late on Thursday.

For Perfeito, the move signals the central bank's intention to limit interest rate hikes. In addition to controlling inflation, higher rates would attract investment to Brazil, helping the real firm against the dollar. At the same time higher rates could also slow growth by making borrowing more expensive.

"I think that this is an effort to adjust expectations a bit because $60 billion is a lot," Perfeito said. "This kind of attitude just before a Copom meeting shows that exchange rate controls won't be carried out only through monetary policy."   Continued...

 
A banner with the new Brazilian real currency notes is seen during a presentation ceremony in Brasilia February 3, 2010. REUTERS/Ricardo Moraes