SAO PAULO Aug 22 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
"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
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
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
"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."
The bank's Copom monetary policy committee, which sets
Brazil's benchmark rate, meets on Aug. 28.
Interest-rate futures contracts suggest that there is a 76
percent chance that the central bank will raise the benchmark
Selic target rate half a percentage point to 9 percent and a 24
percent chance of raising it 1.25 percentage points to 9.25
percent, according to Thomson Reuters data.
The real's weakening and the Copom meeting come as the
United States' central banking authority, the Federal Reserve,
is moving closer to ending a bond-buying program that has
injected billions into the U.S. economy driving down interest
As a result investors have been searching for
higher-yielding, emerging market securities.
With the end of the Fed's "quantitative easing" program
expected soon, capital flows have flowed out of emerging markets
such as Brazil and back to the United States and other developed
countries, helping to weaken the real.
"Today, the big problem is there is a structural change (in
the world economy)," said Eduardo Velho, chief economist with
Miami-based investment bank INVX Global Partners LLC, in São
Paulo. "The central bank's move is an important measure to
reduce volatility and slow the pressure on the exchange rate. I
see this as positive."
On Thursday Brazil's real firmed 0.1 percent to 2.4305 reais
to the dollar.