BRASILIA, Nov 6 (Reuters) – Brazil’s central bank is considering intervening in the foreign exchange market before the end of the year to minimize any potential disruption from anticipated outflows related to the bank’s hedging activity, a central bank director said on Friday.
Speaking at a live online forum hosted by Itau Macrovision, director of economic policy Fabio Kanczuk said officials were “in control” of the issue, in which banks must give up their so-called “overhedge” position on foreign equity investments.
Releasing this position before the end of the year is expected to prompt a hefty outflow. A trader at a large bank in Sao Paulo put the potential flow at $ 15- $ 17 billion.
“The market has to be big, big enough to withstand the very large (out) flows at the end of the year, and the central bank is thinking about alternatives how not to let these flows get in the way,” Kanczuk said.
“We are not sure the market will be able to absorb this, and we think we need to help,” he added.
The Brazilian real has been one of the world’s worst performing currencies this year, losing nearly 30% of its value against the dollar since January.
Kanczuk said the official rate cut had fallen to a current record low of 2.00%, but recently because of growing concerns over Brazil’s fiscal health.
He said Brazil’s fiscal situation has not been detached, nor are there inflation expectations, meaning the promise of the bank’s guidance to keep interest rates low for a long time remains in effect. Kanczuk added, he saw no reason to provide extra stimulation.
Regarding inflation, he gave an optimistic tone. The recent spike triggered by higher-than-expected food prices and is likely to continue for a few more months, but inflation will not be an issue next year or 2022, he said.
The recent spike has been temporary and shouldn’t impact policy. Policy makers are watching inflation developments but remain “very calm”, he said.
Figures on Friday showed that monthly inflation in October surged to 0.86%, the highest for any October since 2002, while the annual rate rose to 3.90%. (Reporting by Marcela Ayres and Jamie McGeever; Editing by Alison Williams)