(Adds market background on inflation expectations, paragraph 7)
By Gabriel Ponte
BRASILIA, Feb 18 (Reuters) – Brazil’s central bank president, Roberto Campos Neto, said on Tuesday the bank is ready to intervene in the foreign exchange market to address illiquidity or excessive market moves in the local currency, the real, as it did last week.
Answering questions from lawmakers in Brasilia, Campos Neto emphasized that the real is a floating exchange rate, and that unlike in the past, its current weakness has not been accompanied by rising risk premiums and falling stock markets.
“We are calm. Obviously, whenever we identify a lack of liquidity, excessive moves, or Brazil is becoming detached from its peers or inflation expectations are being affected, then we will intervene,” Campos Neto said.
The bank waded into the currency market twice last week, its first intervention in almost three months, selling $1 billion of FX swaps contracts both Thursday and Friday as the real slumped to a record low below 4.38 per dollar.
That had taken its losses against the dollar so far this year to almost 10%, making it one of the worst-performing currencies in the world before the central bank acted.
Campos Neto told lawmakers that the real’s current weakness has been a function of falling commodity prices, falling Brazilian interest rates and the dollar’s global strength. Crucially, it has not fueled inflation expectations.
The central bank’s latest weekly “FOCUS” survey of economists shows that inflation expectations are falling, not rising. The average forecast for this year is now 3.22%, well below the central bank’s 4.00% target.
“Interest rate differentials and widening growth expectation differentials between the U.S. and other countries has strengthened the dollar,” Campos Neto said. “So the real’s depreciation now is very different from those in the past.”
The real registered its record low close against the dollar on Tuesday close to 4.36, as the impact of last week’s intervention faded and the 2020 growth outlook darkened further.
In an earlier address to lawmakers, Campos Neto said that the more independent a monetary authority is, the lower inflation is, adding that Brazil is the only country in the Group of 20 major economies without central bank autonomy. (Reporting by Gabriel Ponte in Brasilia Writing by Jamie McGeever Editing by Leslie Adler and Matthew Lewis)
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