Brazil central bank intervenes in FX market rattled by new spending

(Reuters) – Brazil’s central bank on Tuesday made its first intervention in the spot currency market since March in support of the real after it almost touched a six-month low due to fresh concerns about looser government spending ahead of next year’s election.

The government is preparing an expanded welfare program next year, a person with knowledge of the plans told Reuters, with part of the program counted outside of a constitutional spending cap, which investors have used as a gauge of fiscal discipline.

President Jair Bolsonaro, who has seen his poll numbers fall over his mishandling of the pandemic, a weak economy and rising inflation, summoned ministers for a 5 p.m. announcement of the new welfare program, according to a document seen by Reuters.

The plan is to expand the ‘Bolsa Familia’ stipend, which now costs 34.7 billion reais ($6.21 billion) annually, with some 50 billion reais in new temporary funding, renaming the program ‘Auxilio Brasil,’ according to the source, who spoke on condition of anonymity.

The new policy, which would pay some 400 reais per month to 17 million families, represents a defeat for Economy Minister Paulo Guedes, who had drawn the line at 300 reais and tried to keep the program within the spending cap, the source said.

Newspaper O Estado de S.Paulo reported that some 30 billion reais would be counted outside the spending cap. An O Globo columnist reported that 50 billion reais would be exempted.

The Economy Ministry did not immediately respond to a request for comment.

CURRENCY UNDER PRESSURE

The benchmark Bovespa stock index fell nearly 3% and the real slid almost 1%, testing a six-month low before the central bank’s intervention helped to pare losses. (.BVSP)

The central bank sold $500 million in the spot auction after a week of expanding currency swap sales that have failed to prop up the real, which is down about 7% against the dollar so far this year. Investors in the currency have been spooked by political risks, a fragile economic recovery and the prospect for rising interest rates in more wealthy economies.

Those concerns came into clearer focus on Tuesday, with growing rate-hike bets in markets such as Britain, where a cumulative rise of 35 basis points has been priced in by the end of the year. read more

Brazil’s central bank has already raised interest rates by 4.25 percentage points this year to fight double-digit inflation and signaled 100-basis-point hikes at upcoming meetings, while stressing the need for continued fiscal discipline.

Rattled by the outlook for looser spending, interest rate futures surged as much as 50 basis points for 2024 and onward, while pricing in a more aggressive 1.25-percentage-point hike at the next policy meeting this month.

The government is facing growing political pressure to spend more, as an economic recovery sputters, with unemployment stuck near 14% and poverty soaring.

In an interview published late on Monday by news magazine Veja, Arthur Lira, the speaker of the lower house of Congress, defended new social spending outside the spending cap limit.

Lira told Veja that the COVID-19 pandemic’s terrible impact in Brazil, home to the world’s second-highest coronavirus death toll after the United States, meant that fiscal responsibility could not be prioritized over the urgent needs of the most vulnerable.

($1 = 5.5841 reais)

Brazil’s central bank President Roberto Campos Neto said on Tuesday that adverse climate shocks such as heat waves, frosts and prolonged droughts have affected food and energy prices, fueling rising inflation in the country.

Speaking at an online event organized by JP Morgan (JPM.N), he said environmental and climate factors are permeating all aspects of recent economic decisions. Monetary authorities need to watch the vulnerability of the financial system to climate shocks that can cause losses in asset values, he said.

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