The team behind former President Luiz Inácio Lula da Silva’s economic program draws up plans for a more aggressive exchange rate policy, including a search for greater intervention in the currency and tighter regulation of derivatives to contain volatilities.
After the preliminary guidelines for Lula’s program, released in June, described the BC’s stance as passive in the exchange rate, with a harmful effect on inflation, economist Pedro Rossi, who coordinates the Public Policy Monitoring Center (NAPP) in the areas monetary and exchange rate, affirmed that the exchange rate is an instrument of development and must be treated as a strategic price.
“Obviously, it (the exchange rate) must conform to the conditions, that is, it must adapt to the balance of the Brazilian economy, not generate significant imbalances. But it must correct market failures, dysfunctionality, poor price formation. it makes sense to have the currency with the highest volatility among the most important and not do anything about it,” he said.
The real had the highest three-month implied volatility among Latin American currencies since the pandemic, according to Refinitiv data. In the region, the 17% drop in the Brazilian currency against the dollar in this period is second only to the Colombian peso.
Rossi said it was necessary to correct excessive devaluations, making it possible to make use of exchange rate policy tools – such as swaps, underused by the monetary authority in his opinion – and regulatory instruments.
He assessed that the derivatives market is “completely unregulated” compared to the spot market, and that this asymmetry is dysfunctional at certain times.
Rossi recalled that the government has already adopted policies aimed at this market in the past, such as IOF on short positions in foreign exchange derivatives, in 2011, when the government of former president Dilma Rousseff sought to avoid excessive appreciation of the real in the face of expansionary monetary policies adopted by major economies in the world.
“Regulation can go in the direction of transferring part of this liquidity from the derivatives market to the primary exchange market, avoiding excess positions of certain agents, avoiding excess speculative positions that are identified as distorting the exchange rate”, he added. .
The assessment puts Lula’s team at odds with the current management of the Central Bank, whose president Roberto Campos Neto has a mandate until 2024.
Former minister Guido Mantega, who even coined the term “currency war” when the real faced the challenges of overvaluation, told Reuters that the BC had “loosened the exchange rate” in recent years, with fewer interventions than necessary.
For him, the dollar at around 4 reais since 2018 was at its break-even point, but jumped to around 5.50 reais in 2020 and 2021 with little action by the monetary authority.
“The Central Bank should not have allowed this excessive devaluation,” he said.
The loss of value of the Brazilian currency has helped to fuel inflationary pressures at a time when the world is facing a new productive configuration after the shocks caused by the coronavirus and more recently by the war in Ukraine.
For Rossi, the BC has not sought to identify the causes of the Real’s behavior, relying on the majority belief that the market is seeking its own equilibrium.
Despite the BC’s independence assuring that the institution will enter the new government with the same leaders and with its protected performance, he said that the government can define more interventionist guidelines through the National Monetary Council (CMN), where the Executive has two votes, against a vote by the BC.
“The BC will respond to the CMN. BC is not autonomous in defining economic policy objectives. It is autonomous in conducting the instruments,” he said.
Critical of the autarchy’s formal independence, Mantega considered it difficult to change the current rule, stressing that Lula’s campaign works on the assumption that this status will remain.
The former minister, who presided over the Monetary Council for almost nine years, views with reservations the strategy of using the collegiate body to pressure a change in direction in the BC’s performance.
“It is the role of the Monetary Council to establish rules and the strategy of monetary policy, but an independent Central Bank can do damage if it is poorly managed. The Council can mitigate (dysfunctions), but cannot solve it”, he said.
Mantega defends that Lula, if elected, seek dialogue with Campos Neto to find convergences between the monetary authority and the priorities of the next administration.