Regulatory policy

Lula’s advisers are drawing up plans for a more aggressive Brazilian exchange rate policy

A chart displays the Brazilian Real-US dollar and other exchange rates in Sao Paulo, Brazil March 16, 2020 REUTERS/Rahel Patrasso

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BRASILIA, July 21 (Reuters) – Economic advisers to Brazil’s top presidential candidate are drawing up plans for a more aggressive foreign exchange policy, including more market intervention and tougher regulation of derivatives to curb the volatility, senior officials told Reuters.

Economist Pedro Rossi, who heads the monetary policy writing team of former left-leaning president and 2022 frontrunner Luiz Inacio Lula da Silva, criticized the central bank for what he called a no-nonsense approach. interventionist currency, which he said had led to volatility. . He insisted that Brazil use the exchange rate as “an instrument of development”.

These views put Lula’s team at odds with the leadership of Brazil’s newly independent central bank, whose Governor Roberto Campos Neto has a term until 2024, creating the potential for sharp fault lines if Lula wins the October vote.

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Rossi said the central bank is no longer able to make full use of its exchange rate policy instruments, including currency swaps, to correct for periods of excessive currency devaluation.

“Of course, (the exchange rate) has to conform to the conditions. It has to adapt to the balance of the Brazilian economy,” Rossi said. “But it has to fix market failures, malfunctions, bad prices. It makes no sense to have the most volatile currency in the system…among the most important currencies, and not do anything about it” , he added.

The Brazilian real has seen the highest three-month implied volatility among Latin American currencies since the pandemic began in March 2020, according to data from Refinitiv. Its 17% fall against the US dollar over this period is second only to the Colombian peso in the region.

Rossi also said Lula could adopt more regulatory tools, calling the derivatives market “completely unregulated” compared to the spot forex market, which sometimes makes it dysfunctional. He said regulation could push liquidity from derivatives markets to the spot market, removing “excess speculative positions”.

He noted that Lula’s chosen successor, former President Dilma Rousseff, introduced a tax on short positions on foreign exchange derivatives in 2011 to prevent sharp appreciation of the currency as major economies eased monetary policy.

The champion of this policy was former finance minister Guido Mantega. He coined the term “currency wars” while serving under Lula and Rousseff and is now part of Rossi’s foreign exchange policy task force.

“The central bank should not have allowed this excessive depreciation,” Mantega told Reuters, referring to the currency’s fall to around 5.5 reais to the dollar from around 4 to the dollar in 2018. he saw it as a balance point.

However, getting the central bank to adopt a new policy under Lula would be easier said than done. The bank gained formal independence last year with a law giving its governor a term overlapping with presidential terms.

Although prominent economists from Lula’s Workers’ Party have denounced the independence of the central bank, the candidate himself insists he can accept politics and work with Campos Neto.

Rossi suggested that the president would have the power to impose a more interventionist monetary policy through the National Monetary Council (CMN), Brazil’s highest economic policy body, currently composed of the Minister of Economy, the Chief of the central bank and a special secretary to the Treasury.

“The central bank will respond to the CMN. The central bank is not autonomous in setting economic policy objectives. It is autonomous in managing instruments,” he said.

Still, Mantega warned that “an independent central bank could do damage if mismanaged.”

“Counseling can mitigate (the dysfunction), but cannot fix it,” he said.

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Reporting by Marcela Ayres and Bernardo Caram Additional reporting by Jose de Castro Editing by Brad Haynes and Rosalba O’Brien

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