Brazil central bank chief says higher interest rates, positive fiscal are supporting FX

By Marcela Ayres

BRASILIA (Reuters) -Brazil’s central bank chief Roberto Campos Neto said on Tuesday that higher interest rates to combat double-digit inflation are supporting financial inflows, strengthening the Brazilian currency.

Addressing a conference hosted by investment bank BTG Pactual, he also said positive fiscal figures are helping to attract investment to the country, among other reasons that explain the recent exchange rate behavior.

In the year, the real has already risen more than 10% against the dollar, the best global performance for the period, easing pressures on consumer prices after inflation reached 10.4% in the 12 months through January.

“In the exchange front, I think there are several variables. There is a variable that is the higher interest rate itself, which brings flows because of the interest rate differential,” said Campos Neto.

Conducting an aggressive monetary tightening to tame inflation, the central bank has put interest rates at 10.75% from its record-low 2% last March, already signaling the need for extra adjustments ahead.

According to the central bank chief, a “relevant” part of the movement in foreign exchange comes from the shift in global flows, with investors moving from more leveraged companies to businesses that perform well in environments of higher inflation.

He pointed out that established and large companies in emerging markets operate with this profile and policymakers have seen inflows to the Brazilian stock market.

Local banks also ended unwinding their so-called ‘overhedge’ position due to new regulation in the country, a move that pressured the currency over the last two years.

Campos Neto said that inflation in Brazil would begin to fall faster between April and May, noting that this does not mean that it will reach its peak in these months.

(Reporting by Marcela AyresEditing by Chris Reese and Sandra Maler)