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The Central Bank Faced Distinct Challenges Under the Bolsonaro and Lula Administrations, with Record Interventions Under the First and Caution Under the Second. As the Dollar Hits R$ 6, Pressure Mounts for New Actions. But How Far Should the BC Go to Stabilize the Market? Discover How the Floating Exchange Rate Affects Your Life!
The variation of the dollar has a direct impact on the Brazilian economy and affects everything from inflation to the prices of imported goods.
During the last two administrations, the Central Bank (BC) adopted completely distinct strategies to deal with the appreciation of the American currency.
Under Jair Bolsonaro’s administration, the monetary authority sold dollars in the spot market 113 times. In contrast, during Luiz Inácio Lula da Silva’s administration, so far, only one intervention has been recorded.
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Understanding the Scenario: The Role of the BC in the Floating Exchange Rate
Brazil has adopted a floating exchange rate regime since 1999, which means that the value of the dollar is determined by the market, based on supply and demand.
The BC only intervenes in situations deemed to be dysfunctional, such as extreme volatility or currency crises. Among the instruments the BC uses to intervene are:
- Direct Sale of Dollars in the Spot Market, as a way to supply the lack of offer and balance the currency quotation;
- Currency Swap Contracts, which act as protection for companies and investors who have debt or operations in dollars, without the need to touch international reserves
In the period between 2013 and 2018, for example, the BC went six years without selling dollars in the spot market. This changed drastically starting in 2019, when the monetary authority began to intervene more frequently due to several factors, such as a drop in the Selic rate and political instability
Bolsonaro Administration: 113 Interventions and US$ 74 Billion Sold
According to the UOL portal, during Jair Bolsonaro’s administration, the Central Bank (BC) conducted 113 interventions in the spot exchange market, resulting in the sale of approximately US$ 74 billion. This more active stance was due to a combination of economic factors that directly impacted the exchange rate during that period.
Among the main reasons cited are:
- Drop in Interest Rates (Selic): In 2019, Brazil reduced the interest rate from 6.5% to 4.5%, making the local market less attractive to foreign investors. This led to a capital outflow, pushing the dollar up
- COVID-19 Pandemic: The global health crisis, which began in 2020, brought significant instability to financial markets. The BC needed to act to prevent a further devaluation of the real against the dollar
- Electoral Volatility: In 2022, an election year, the BC intervened 11 times between September and December, totaling US$ 13 billion in sales. These operations occurred amid fears of political instability
Lula Administration: One Single Intervention So Far
In 2023 and 2024, the posture of the Central Bank changed significantly. During the first year of Lula’s administration, no direct intervention was made in the spot market. However, in September 2024, the BC sold US$ 1.5 billion, justifying the action as a response to specific imbalances in the market.
The change in posture can be attributed to factors such as:
- Preservation of International Reserves: Reserves fell from US$ 374 billion in 2018 to US$ 324 billion by the end of 2022 due to sales during Bolsonaro’s administration. By September 2024, reserves stood at US$ 360 billion
- Fiscal Risk Scenario: Economists assess that the main factor driving the dollar’s rise currently is the perception of risk regarding public debt, which affects investor confidence
Currency Swap Contracts: A Complementary Tool
Another important indicator is the balance of currency swap contracts, which also reflects the Central Bank’s actions in the exchange rate. During Bolsonaro’s administration, these contracts rose by 46%, from US$ 68.8 billion to US$ 100 billion. In Lula’s administration, the increase was more modest, at only 2%, reaching US$ 102.8 billion
Why Are the Strategies So Different?
The differences in exchange rate policies reflect the economic scenarios and priorities of each government.
- In Bolsonaro’s administration, the pandemic and political instability required a more aggressive stance to contain market volatility.
- In Lula’s administration, although macroeconomic conditions were challenging, they allowed for a more cautious approach focused on maintaining reserves and using less invasive instruments
Are the International Reserves Still Sufficient?
The international reserves, which today total around US$ 360 billion, are an important buffer against currency crises.
However, their reduction over the years has raised concerns. Economists point out that the sale of dollars, although necessary at times, cannot be a long-term solution to the structural problems of the economy
What Is the Future of the Central Bank’s Interventions?
With the dollar rising again and nearing R$ 6, pressure is mounting for the BC to intervene in the exchange rate again. Nevertheless, analysts emphasize that targeted actions do not solve issues like fiscal distrust.
“Improving fiscal policy is the most effective way to stabilize the exchange rate,” says José Ronaldo de Castro Júnior, a professor at Ibmec-RJ
And you, do you think the Central Bank should intervene more frequently in the exchange rate or maintain caution?
Acho que a alta do dólar está maculada pela política de interesses externos, como buscar uma nova redução de investimentos querendo frear a competitividade do Brasil e China, que como parceiros tem hoje uma condição, que pode frear a voracidade nacionalista e isolacionista de Trump. Por isto não deve ainda intervir no mercado. Melhor esperar a realidade das primeiras ações do governo Trump.