May 22, 2020 / 2:53 PM / 16 days ago

QE, lower-bound rates pose huge risks for Brazil, says central bank director

BRASILIA (Reuters) - Brazil should steer clear of quantitative easing or cutting interest rates toward zero, a central bank director said on Friday, warning that both risked distorting markets, weakening the currency and increasing financial instability.

FILE PHOTO: Traders work at Necton brokerage after an automatic circuit breaker was triggered twice today in Brazilian stock exchange in Sao Paulo, Brazil March 12, 2020. REUTERS/Amanda Perobelli

Speaking in an online event hosted by Swiss bank UBS, economic policy director Fabio Kanczuk gave a clear signal that Brazil is reluctant to use the extraordinary policy tools seen across much of the developed world.

Quantitative easing asset purchases, which would lower long-term interest rates, limits the market’s ability to price fiscal risk at the longer end of the rates curve, Kanczuk said. This would only show up elsewhere, most likely in the currency.

“If we do QE, if we remove the (risk) premium from the curve, it will be reflected in some other financial asset, most notably the exchange rate,” he said.

Brazil’s real has fallen 28% against the dollar this year, with one of the main drags being interest rates falling to a record low 3.0% and expected to fall further.

Facing Brazil’s biggest annual economic downturn since records began in 1900 due to the coronavirus pandemic, calls have increased for the central bank to reduce rates to the so-called “lower bound,” effectively zero in developed economies but probably slightly higher in emerging countries.

The central bank has been granted emergency powers to buy government bonds, or conduct QE. But Kanczuk warned that QE and lower-bound interest rates would only raise inflationary pressures, weaken the currency and threaten financial stability.

“Quantitative easing as a monetary policy tool is not what we have in mind. QE would distort (rates) market prices,” he said.

On FX intervention, Kanczuk said the central bank is “prepared” and can tackle any market dysfunction by selling FX swaps or reserves.

Central bank president Roberto Campos Neto said this week the bank has ample room to continue intervening if it sees fit.

Reporting by Jamie McGeever and Marcela Ayres; Editing by Chizu Nomiyama

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