Brazil central bank spends $1bn to support real

The Central Bank of Brazil (BCB) spent $1 billion on swap contracts to halt a depreciation of the real on October 13.

Brazilian media conglomerate Globo reported that the central bank had sold up to 20,000 future swap contracts. Globo also said the BCB last made a major unexpected sale of dollars on September 30, and that this was only half as large.

MercoPress, a Brazilian news agency, reported that the BCB would sell another $1 billion on October 14.

The central bank announced on September 24 that it would stage additional offerings of foreign exchange swap contracts every Monday and Wednesday, beginning on September 27.

The real has been falling against the dollar since June, when it peaked at slightly more than 4.9 to the dollar. Brazil’s currency rose from 5.57 to the dollar to finish at about 5.50 when trading closed on October 13.

The central bank has carried out five increases in the policy rate this year, totalling 425 basis points. The most recent increase, a 200bp hike on September 22, brought the policy rate to 6.25%.

Inflation is well above the central bank’s target for this year of 3.75%, within a band of plus or minus one-and-a-half percentage points.

Brazil’s statistics agency recorded year-on-year consumer price index inflation of 10.25% in September.

Year-on-year inflation was 4.56% in January and has risen every month since. On October 13, Fabio Kanczuk, a member of the BCB’s board of governors, said the central bank could alter the pace of rate increases, Bloomberg reported.

Kanczuk, who is in charge of the economic policy portfolio, told an audience at an HSBC event that “Our 100bp pace is a hint, not a commitment. You see the new data and you analyse it again. Things are changing all the time.”

The BCB reported having nearly $370 billion in international reserves in October 2021, a figure that has increased by about 10% over the past 18 months. The International Monetary Fund estimated Brazil’s international reserves equalled 19.5% of GDP at the end of 2020.

An April 2021 article published by Allianz noted that many Latin American countries carry “excess reserves” above their external financing needs.

The IMF assigned Brazil nearly 10.6 billion special drawing rights (SDRs), worth nearly $15 billion, in its August allocation of new SDRs.

Brazil has also suffered heavily from the Covid-19 pandemic and political uncertainty. According to data collated by Johns Hopkins University, more than 600,000 Brazilians have died of the disease. President Jair Bolsonaro has resisted vaccination, and his government is beset by increasing instability.

Bolsonaro’s supporters mounted protests against his political opponents and the supreme court on September 7, with some calling for him to lead a coup d’etat. Anti-Bolsonaro demonstrators have demanded his impeachment.