Brazil’s central bank announced plans to sell up to $3 billion in a spot auction on Thursday, marking its fourth intervention this week due to a sharp depreciation of the real. The move came after the currency fell by 3% on Wednesday, fueled by mounting concerns over the country’s fiscal situation. The auction prices will be based on the official PTAX rate, which is the standard exchange rate.
The central bank had already stepped in during mid-December, selling about $6 billion in the spot market over three consecutive days due to significant capital outflows. Despite these efforts, the real continues to weaken, down nearly 23% this year. This has led to increased doubts regarding President Luiz Inacio Lula da Silva’s ability to stabilize Brazil’s public finances.
As the real continues to decline, central bank officials are growing more concerned about the broader impact of a weakened currency. A devalued real could exacerbate inflation, which has remained above the central bank’s 3% target. Consumer prices are expected to rise further, which will likely put pressure on the economy.
To combat inflation, the central bank raised interest rates by a full percentage point this month, bringing the benchmark rate to 12.25%. Additionally, officials have signaled that they plan to raise rates further, with two more hikes expected by March. These measures are intended to counteract the inflationary pressures driven by the falling currency.
Central bank policymakers, led by Roberto Campos Neto, are closely monitoring the effects of currency devaluation on domestic prices. With inflation forecasts still elevated, the central bank is committed to taking additional steps to safeguard the economy, even as the challenges of stabilizing the real grow more complicated.
