BRAZIL'S FOREX POLICY-How the maxi-band works
Reuters, Wednesday, January 13, 1999 at 23:26
By Shasta Darlington
SAO PAULO, Jan 13 (Reuters) - Brazil's Central Bank widened
its foreign exchange trading band on Wednesday, devaluing the
nation's currency, the real, by almost 9 percent against the
dollar.
The Central Bank scrapped a tight mini trading band that it
has used for the last four years to closely control the slow
depreciation of the real against the dollar.
The currency will now trade in a maxi-band established
Wednesday morning. As the Central Bank widens and shifts the
band yielding to market pressures, the real's maximum
devaluation could reach 15 percent by January 2000.
The Central Bank set the maxi-band at between 1.20 and 1.32
reais against the dollar, with about a 10 percent difference
between floor and ceiling rates. The currency responded
immediately, tumbling 9 percent to 1.32 reais to the dollar.
That compares with an 8.9 percent variation in the former
maxi-band set at between 1.12 and 1.22 reais per dollar. Under
the former policy, the real only traded in a tighter mini-band
that only allowed for a 1 percent fluctuation and that was
devalued about 0.6 percent a month.
The "crawling peg" was implemented in 1995 following the
Mexico peso crisis in a bid to further control foreign exchange
rates and became an integral part of the government's
inflation-busting Real Plan.
In a bid to make the foreign exchange policy more flexible,
the Central Bank said it will adjust the new maxi-band every
three days, allowing for a further depreciation of the real of
up to 3 percent a year.
Francisco Lopes, who was appointed interim president of the
Central Bank after Gustavo Franco surprised markets by stepping
down this morning, said the new band also, "creates a
possibility for us to reduce interest rates."
Over the last four years, Brazil has had to maintain high
interest rates to protect its strict monetary regime and still
attract foreign capital, analysts said.
"This is a very important change," said Marcelo Allain, an
economist at BMC Bank in Sao Paulo. "Just to sustain a gradual
change in the exchange rate implied very high interest rates
domestically. It wasn't sustainable."
Under the new regime, the Central Bank will only intervene
in the market if the real begins to trade at the limits of the
maxi-band. If it hits the ceiling, the bank will sell dollars
and if it hits the floor, it will buy dollars.
If the foreign exchange rate continues to push up against
the outer limits, the maxi-band will be shifted.
If the real trades at the ceiling of the maxi band for
three straight working days, the Central Bank can raise the
ceiling by increments equivalent to 0.0030 percent per month
and the floor will remain the same.
If the real trades at the floor rate of the maxi band for
three straight working days, the Central Bank can raise the
floor rate by increments equivalent to 0.0030 percent per month
and raise the floor rate by 0.0060 percent per month.
By the end of the year, the rate of fluctuation will be
about 6 percent between the center of the trading band and
either the floor or ceiling rate, compared with 4.76 percent in
the current maxi band.
The ceiling of the maxi band could devalue by between 12
and 15 percent by January, 2000 depending on market tendencies,
the Central Bank said in a statement.
shasta.darlington@reuters.com))
Copyright 1999, Reuters News Service
|
