Brazil's New Central Bank Head Vows New Trading Band Will Hold
Brazil's Central Bank Head Vows Trading Band to Hold (Update1)
(Updates with more comments from Lopes)
Brasilia, Brazil, Jan. 13 (Bloomberg) -- Brazil's new
central bank president, Francisco Lopes, said he will maintain
the new currency trading band to discourage further speculation
against the real.
''We have almost $45 billion in reserves and we are willing
to use these resources and raise interest rates to defend our
foreign exchange regime,'' said Lopes at a press conference this
morning.
Lopes, 53, took over from Gustavo Franco, who resigned after
the government opted to accelerate the pace of devaluation.
Franco has been criticized by business leaders for defending the
currency, at the cost of depleted reserves and high interest
rates.
Lopes said Brazil has more than $70 billion on hand to
defend the currency, including the $41.5 billion in aid from the
International Monetary Fund and other lenders, along with about
$35 billion in Brazil's own reserves.
In his first day in command of the central bank, Lopes, a
Harvard University graduate and former central bank director of
monetary policy, faced his first challenge as stocks plunged and
the real devalued past the limits of the newly-set trading band.
Economists said the bank may have trouble maintaining the
band, after the currency weakened 8.8 percent today, more than in
all of 1998.
''We need to see if capital flight continues or not,'' said
Ashok Shah, head of emerging market equities at Old Mutual Asset
Managers, which has 45.7 billion pounds under management. ''It's
quite likely that with a fixed range devaluation it means the
market will smell blood and go for a further devaluation.''
Rising Budget Deficit
Lopes said investor confidence will be restored as the
government takes steps to bring down its $64 billion budget
deficit. Stocks rebounded from a 10 percent drop, with the
benchmark index down 3 percent.
''Markets are nervous now trying to understand the new
policy,'' said Lopes. ''The sustainability of this policy will
show itself as dollar flows normalize but will ultimately depend
on the country's efforts to implement a fiscal adjustment.''
Lopes downplayed the importance of today's change in foreign
exchange policy, under which the real will float more freely
against the dollar, trading in a wide currency band, with 10
percentage points from top to bottom. The inner trading band was
removed.
''We think it is better to have a less and less government
intervention in the foreign exchange market,'' he said.
''The central bank has a very strong record of very tight
monetary policy. We are very explicitly committed to keep a very
tight monetary policy.''
He said the real should devalue about 12 percent or 15
percent this year, after losing almost 9 percent today alone.
''This policy should not be understood as a break from the
past. It's an improvement. It's not by itself a panacea.''
Rates to Fall
He said rates should decline, after a short-term increase.
''We will increase interest rates in the short turn if it is
necessary.
''The basis for stability is to have solid fiscal
fundamentals. We're very optimistic about that. We're very
optimistic that in the next few months we will have the program
implemented.''
The central bank adjusted the ceiling of its trading band to
1.32 reais today, from 1.22 reais, speeding the yearly
devaluation of the currency, widening the band in which the real
trades.
Lopes said Brazil can still meet the budget deficit targets
set by the International Monetary Fund as part of a $41.5 billion
aid package. These include a cut in the budget deficit to a level
equal to 4.7 percent of gross domestic product this year, from 8
percent.
Still, he said a new foreign exchange system wasn't included
in the IMF agreement, and will have to be discussed with IMF
officials.
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