The Brazilian Ministry’s Targeting Plans for Foreign Exchange Reserves – Sources

The Brazilian Ministry’s Targeting Plans for Foreign Exchange Reserves – Sources

Written by Marcela Ayres and Bernardo Karam

BRASILIA (Reuters) – Brazil’s Economy Ministry is considering a target for the country’s large foreign exchange reserves, two sources told Reuters, as inflation remains a concern for voters ahead of the presidential election.

The plan would set a target for a minimum and maximum amount of foreign currency that Brazil should hold in its reserves, which currently stand at $338.7 billion.

The officials, who asked not to be identified due to their sensitive nature, said the floating teams plan is preliminary and subject to change or the government may decide not to pursue the idea.

The Ministry of Economy and the Central Bank declined to comment.

Foreign reserve sales by the central bank help contain the dollar’s rise against the Brazilian real, and ease inflationary pressures.

The central bank, which is independent of the federal government, said it only works in the foreign exchange market when it identifies sharp fluctuations.

Rising consumer prices is a major topic in Brazil ahead of the October elections, with President Jair Bolsonaro trailing former leftist President Luiz Inacio Lula da Silva in opinion polls.

The goal was first reported on Tuesday by O Globo newspaper.

One official said aiming with floating bands would avoid political manipulation of the reserves, especially in an election year.

This would directly contradict the exchange rate policy which rests entirely with the central bank.

The existence of such a plan surprised senior technicians at the Economy Ministry, who said there was no agreement on a target for reserves. A central bank source criticized the idea, saying the exchange rate was an “external variable, over which you have no control.”

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“This is stupid,” said Alexander Schwarzman, a former director of the central bank. He said the currency reflects economic fundamentals and it does not make sense to control its fluctuations.

Lula said he would not touch the country’s foreign exchange reserves if he was elected.

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