Brazil Monetary Policy July 2016


Brazilian real rises to almost-one-year high; Goldfajn takes Central Bank reins

The Brazilian real (BRL) rallied to the strongest value in almost one year at the end of June as expectations regarding the next hike in U.S. interest rates changed and the Central Bank refrained from halting the currency’s appreciation. On 30 June, the real closed the day at 3.21 BRL per USD, which represented a sharp 11.0% appreciation over the same day of the previous month. As of that date, the real had gained 18.9% year-to-date, yet remains 3.6% weaker in value compared to the same day last year.

The real’s appreciation came on the back of expectations of that the U.S. Federal Reserve would delay in further interest rate given heightened uncertainty about the global economy in the aftermath of the UK’s Brexit vote. In addition, the strengthening was due to the Central Bank pausing its intervention in the currency. However, the Bank has been trying to keep the value of the real low to support the country’s exports in the midst of a deep economic recession. Therefore, at the beginning of July, the Central Bank resumed intervening in the exchange rate market through the sale of reverse swaps and the real lost some ground.

The Bank’s latest interventions in the exchange rate markets come despite a change in governance. In June, Ilan Goldfajn took over as the President of Brazil’s Central Bank. While a monetary policy meeting has not been held since Goldfajn took the reins, the Bank published its Q2 inflation report on 28 June, providing a first glimpse of Goldfajn’s intentions. The report struck a more hawkish tone and stated the goal of bringing inflation to the 4.5% target by the end of 2017. Commenting on the effects of recent exchange rate trends and the new governor’s remit, economists at JPMorgan add:

“BRL is the outperforming EM currency this month, appreciating more than 10% against the USD, and we now project USD/BRL at 3.50 by year-end, down from 3.90. If it reaches this level, the increased credibility and stronger BRL should also allow a lower terminal rate at 11.75% by April 2017 (prior 12.75%). The risk is that a stronger currency and higher rates in the near term result in weaker economic outcomes, which could also generate political pressure and test the new governor’s independence. On the positive side, the change in monetary and FX policy management should reinforce the disinflation trend and we also revised our IPCA forecast for next year to 5.4% (from 5.7%).”

Against this backdrop, our panel expects the real to end 2016 at 3.57 BRL per USD. In 2017, panelists believe the real will depreciate to 3.74 BRL per USD

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Brazil Monetary Policy Chart

Brazil Exchange Rate July 2016 0

Note: BRL per USD (eop)
Source: Thomson Reuters and FocusEconomics Consensus Forecast.

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