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UPDATE 1-Brazil cenbank weighing up FX action to prevent 'overhedge' volatility - director

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BRASILIA, Nov 6 (Reuters) - Brazil’s central bank is considering intervening in the foreign exchange market before the end of the year to minimize any potential disruption from large anticipated outflows related to banks’ hedging activities, a central bank director said on Friday.

Speaking in a live online forum hosted by Itau Macrovision, economic policy director Fabio Kanczuk said officials were “all over” the issue, in which banks must unwind their so-called “overhedge” positions on overseas equity investments.

Unwinding these positions before the end of the year is expected to prompt a hefty outflow. One trader at a large bank in Sao Paulo put the potential flow at $15-$17 billion.

“The market needs to be big, big enough to withstand a very large (out)flow at the end of the year, and the central bank is thinking about alternatives on how not to let this flow be disruptive,” Kanczuk said.

“We are not sure the market will be able to absorb this, and think we will need to help,” he added.

Brazil’s real has been one of the world’s worst-performing currencies this year, losing almost 30% of its value against the dollar since January.

Kanczuk said that had been down to a steady decline in official interest rates to the current record low 2.00%, but more recently due to growing concerns over Brazil’s fiscal health.

He said Brazil’s fiscal situation had not become de-anchored yet, and nor had inflation expectations, meaning the bank’s forward guidance pledge to keep interest rates low for a long time remained in place. Kanczuk adding he saw no reason to provide extra stimulus.

On inflation, he struck a sanguine tone. The recent spike fueled by food prices has been higher than expected and is likely to continue for a few more months, but inflation will not be a problem next year or 2022, he said.

The recent spike is temporary and should not affect policy. Policymakers are watching inflation developments but remain “super calm”, he said.

Figures on Friday showed that monthly inflation in October jumped to 0.86%, the highest for any October since 2002, while the annual rate rose to 3.90%. (Reporting by Marcela Ayres and Jamie McGeever; Editing by Alison Williams)

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