The announcement follows an emergency meeting President Dilma Rousseff called on the evening of Aug. 21 at her residence, Palacio Alvorada, to discuss the weakening currency with central bank president Alexandre Tombini and Finance Minister Guido Mantega. Tombini canceled a trip to Jackson Hole, Wyoming, for the meetings of the world’s top monetary policy makers so he could monitor Brazilian markets.
Policy makers must address fundamental economic issues for investors to regain confidence, Carlos Kawall, the chief economist at Banco J. Safra SA, said by phone from London.
Brazil’s fiscal situation has deteriorated as policy makers increase expenditures while implementing tax cuts worth 35.1 billion reais during the first six months of the year, according to the national tax agency.
“Aside from what the central bank is doing, the government needs to make more difficult decisions to make its fiscal policy more credible,” Kawall said.
Following the central bank’s announcement of the program yesterday, Treasury Undersecretary Paulo Valle told reporters in Brasilia that the Treasury stands ready to act when necessary. The best strategy in moments of volatility is to reduce the debt duration by buying back long-term bonds and selling short term, Valle said.
The real has tumbled 17% this year as investors questioned Rousseff’s ability to attract investment and cut government spending, which has kept inflation above the midpoint of policy makers’ target for 35 months.
Consumer prices as measured by the IPCA-15 price index climbed 0.16% in the month through mid-August, the national statistics agency reported Aug. 21. That was more than double the 0.07% inflation rate in the month through mid- July. Annual inflation eased to 6.15% after surpassing the 6.5% upper limit of the central bank’s target range earlier this year.
Brazil has raised its target lending rate in 2013 more than any major economy, increasing by 1.25 percentage points from a record low 7.25% in April.