September 26, 2019 / 4:31 PM / 18 days ago

UPDATE 1-Brazil central bank "closely" monitoring FX spillover

(Adds detail, quotes)

By Jamie McGeever

BRASILIA, Sept 26 (Reuters) - Brazil’s central bank is closely watching the real’s exchange rate for signs that its recent weakness is pushing up risk premia in financial markets or stoking inflation expectations, central bank president Roberto Campos Neto said on Thursday.

So far, neither appears to have happened, but the bank stands ready to take appropriate steps if it sees distortions in the market, he told reporters in Brasilia following the release of the bank’s Quarterly Inflation Report.

“The dollar’s rise has not been accompanied by higher risk premia,” Campos Neto said, noting that the dollar’s rise to 4.20 reais was partly a global move and partly a result of Brazilian firms paying down foreign debt.

“We are watching this closely,” he said.

Despite the real’s recent weakness - it depreciated 8% against the dollar in August, its biggest monthly fall in four years - inflation and inflation expectations remain well-anchored.

Using market-based projections for FX and interest rates, the central bank expects inflation to be around 3.3% this year and 3.6% next year, both significantly below its official targets of 4.25% and 4.00%, respectively.

Even modeling for the lower end of currency and interest rate forecasts, inflation next year will likely be around 3.8%, the central bank said.

While Brazil operates a floating exchange rate, Campos Neto said there is no “dogma” at the central bank regarding FX intervention, and it will address distortions wherever they arise, whether in the spot or derivatives market.

Campos Neto said last month’s landmark sale of dollars in the spot market, the first for over a decade, made sense because that is where the demand for dollars was. In recent years, the central bank has intervened via the FX swaps market.

“Our aim is to intervene as cleanly as possible, meeting demand as directly as possible, at the lowest cost for the government,” Campos Neto said.

On the economy, Campos Neto reiterated the Inflation Report’s thrust that growth should accelerate next year to 1.8% from 0.9% this year, although tail risks are rising, particularly in the global arena.

The central bank cut interest rates last week by half a percentage point to a new low of 5.50%. In its Inflation Report on Thursday, it again said that a benign inflation outlook should pave the way for further monetary stimulus.

$1 = 4.15 reais Reporting by Jamie McGeever Editing by Chizu Nomiyama and Alistair Bell

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