The Brazilian central bank sold $911 million from its $207 billion reserves and strengthened the real by 4% by yesterday afternoon. The bank’s intervention came in response to a 50% rise in the value of the dollar against the real over the last two months.
Monetary policy officials also eased bank reserve requirements this week to inject as much as $30 billion in liquidity to shore up medium-sized banks.
The central bank is unlikely to reverse its tight monetary policy, despite an IMF official suggesting that it should consider lowering interest rates. It took steps to boost liquidity this week and successfully stemmed panic in the financial markets.
But Charles Collyns, deputy director of the IMF’s research department, told Emerging Markets: “There is room to adjust monetary policy. Risks are now shifting away from inflation.”
Collyns said: “Brazil has had very prudent macroeconomic management in the last few years and is going to benefit from that track record. They will have more room of manoeuvre to respond to difficult situations.
“Policy management has been strong. There have been major improvements in the government’s ability to respond to these issues compared to previous episodes. The government has responded very quickly to deal with the shortage of liquidity in the market and the shortage of export credit.”
The response to the crisis had been “sensible”, but monetary authorities should go further, Collyns suggested. “There is room to adjust monetary policy if the growth risks increase further. The central bank has been proactive in dealing with inflationary pressures, these pressures have been contained well in Brazil relative to other countries, and provides room for the central bank to move in the other direction and start to cut rates if the outlook continues to deteriorate.”
Marcelo Carvalho, chief economist at Morgan Stanley in Sao Paulo, greeted the central bank’s actions. “The strategy to calm the market down is working,” he said.
Brazil’s benchmark Selic interest rate currently stands at 13.75% after the central bank launched another round of monetary tightening earlier this year to keep inflation on target. Reversing such policy at this stage would be unlikely, according to several Brazil-based analysts.
Alexandre Schwartsman, Santander’s chief economist in Sao Paulo and former central bank director, said: “The biggest impact of the global crisis is that it is going to increase inflation. Against this background, the central bank will continue to pursue a tight monetary policy.”
Silvio Campos Neto, chief economist at Banco Schahin, said: “It is highly unlikely that they would cut rates right now. The most they can do is to stop hiking interest rates again.”