Brazil central bank commits $60bn to prop up currency

  • 23 August 2013
  • From the section Business

Brazil's central bank has announced a $60bn plan to prop up the value of the national currency.

It comes as the Brazilian real nears a five-year low against the US dollar.

The real and other emerging market currencies have fallen steadily over the last three months on speculation of higher US interest rates.

The central bank said it would spend $500m a day on Mondays to Thursdays and $1bn on Fridays buying reais in the currency markets.

The Monday-to-Thursday interventions will target currency swap markets - financial derivatives used by companies and investors to hedge their currency exposure - while on Fridays, the central bank will buy the national currency directly in return for US dollars.

The interventions will run up until December.

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

It is the first time the central bank has pre-announced daily interventions in this way since 2002 - a time when markets were speculating over a possible Brazilian debt default, following the financial collapse of neighbouring Argentina and with the imminent election of President Luiz Inacio Lula da Silva.

Inflation fears

The weaker currency is raising the cost of imports, which in turn increases the cost of living for Brazilians and raises concern that inflation could get out of control.

It could also put pressure on any Brazilians who have taken on large debts, particularly if the debts are denominated in foreign currency.

Brazil and India have been at the brunt of the recent change in market sentiment, with the real down 16% against the dollar since May.

Both countries benefited from inflows of foreign money over recent years as investors and speculators have been able to borrow cheaply in the dollar.

That process now appears to be unwinding, as the long-term cost of borrowing rises on speculation that the US Federal Reserve is preparing to curtail its monetary stimulus programme, perhaps as soon as next month.

Another victim of the loss of market confidence in emerging markets has been Indonesia, whose currency, the rupiah, has fallen to a four-year low.

Indonesia's finance minister has announced measures to return the country to a trade surplus, including the lifting of restrictions on mineral exports and the imposition of taxes on imports of luxury cars and branded products.

Inflation dilemma

Concerns over Brazil have been heightened by inflation rising well above 6% in recent months, and doubts about the central bank's willingness and ability to contain it.

The country suffered from hyperinflation in the 1980s and 1990s, although price rises have remained in single digits ever since.

The central bank faces a difficult dilemma. The weak currency and rising inflation would normally be tackled by higher interest rates.

However, the country's economy has ground to a halt as Chinese demand for the country's mineral exports has weakened.

The authorities' room for manoeuvre has also been limited by recent street protests.

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