SAO PAULO (Reuters) – Brazil's currency faced a choppy market on Monday, opening sharply lower against the U.S. dollar after renewed criticism of interest rates by President Luiz Inacio Lula da Silva but easing loss after central bank intervention.
Speaking in an interview with TV Globo that aired late on Sunday, the leftist leader called the interest rate hike “irresponsible” and said his government would “take care of that,” citing on possible policy changes ahead.
Onward (LON:) year, there will be a majority of members chosen by Lula on the central bank's rate-setting board, including his choice for governor.
Initially the Brazilian real weakened 1% against the US dollar, continuing a sharp decline caused by the market's disappointment with an expected cost-cutting package unveiled by the government at the end of November.
But losses were cut after the central bank announced a dollar spot auction in which it sold $1.63 billion, a move it had also filed on Friday. The bank will also hold a dollar-denominated auction with repurchase agreements for up to $3 billion on Monday.
The largest economy in Latin America has lost its currency by almost 20% this year, ranking among the worst performers in emerging markets.
The downward trend continued despite the central bank's move earlier this month to accelerate the pace of its monetary tightening with a 100-basis-point hike, taking interest rates to 12.25%, and matching moves for the next two meetings.
“The only thing wrong in this country is that the interest rate is above 12%. There is no explanation,” Lula said in the interview after he was released from the hospital after emergency surgeries to treat and stop bleeding in his head.
“Inflation is around 4%, fully under control,” he said. “The irresponsible ones are the ones raising interest rates, not the federal government. But we will take care of that.”
The central bank's hawkish move this month cited the market's negative reception of the fiscal package as a worsening factor on inflation dynamics, as inflation expectations move away from the regulator's 3% target.
The central bank's weekly survey of private economists continued to show higher median inflation forecasts for this year and next, despite economists now predicting interest rates to peak at 14.25% in March.
Brazil's 12-month inflation ended November at 4.87%, above the upper end of the bank's target range of 1.5% to 4.5%, while policymakers have pledged to bring inflation back to 3% .
Lula has been a vocal critic of high interest rates and has defeated central bank governor Roberto Campos Neto, nominated by former right-wing President Jair Bolsonaro, several times since taking office. office for a third non-consecutive term in 2023.
Campos Neto's term ends this month and he will be replaced by Gabriel Galipolo, nominated by Lula.
Next year Lula's nominees will hold a 7-2 majority on the bank's nine-member rate-setting committee, up from the current 4-5 minority.
