Brazil – Exchange Rate Stability and Monetary Policy Easing

The BRL remains stable. The government continues to apply all the tools available to avoid a further exchange rate depreciation which would boost inflation (through the pass-through) and inflation expectations.

Brazil has a high volume of international reserves that reached $187 billion. Different from Mexico, the Brazilian government is unlikely to use the drawing facility (of $30 bn) established with the Federal Reserve.

On the monetary front, the central bank is ready to start another round of interest rate cuts. We confirm our call that the Central Bank will decrease rates by 100 bp on April 29. The policy-setting SELIC rate, a key indexing unit for local-currency debt obligations, is currently set at 11.25%. The erosion in labor market conditions may also prompt the monetary authorities to be more aggressive this week; official statistics indicated that the unemployment rate reached 9% in Brazil during the month of March. Exchange rate volatility has been relatively contained over the past three months on the grounds of a more benign external financial environment, decisive intervention by the Brazilian authorities and ongoing progress in the attainment of inflation targets.

On the external front, the current account deficit reached USD1.6bn, well below the USD4.3bn deficit seen in Mar'08 but larger than the $611 deficit posted in February. The key culprit for this worsening was the increase in profit remittances by multinational companies. The picture is not as bad as other countries, however. The foreign direct investment during the 12-month period ending in March 2009 reached US$41.6 billion, amply covering the current account deficit of US$22.9 billion over the same period.


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