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The Central Bank faced different challenges during the Bolsonaro and Lula governments, with record interventions in the former and caution in the latter. With the dollar hitting R$6, pressure is growing for new actions. But how far should the Central Bank go to stabilize the market? Find out how the floating exchange rate affects your life!
The variation of the dollar has a direct impact on the Brazilian economy and affects everything from inflation to the prices of imported products.
During the last two governments, the Central Bank (BC) adopted completely different strategies to deal with the appreciation of the American currency.
During Jair Bolsonaro's administration, the monetary authority sold dollars on the spot market 113 times. In contrast, during Luiz Inácio Lula da Silva's administration, only one intervention has been recorded so far.
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Understanding the scenario: the role of the BC in floating exchange rates
Brazil has adopted a floating exchange rate regime since 1999, which means that the value of the dollar is determined by the market, based on supply and demand.
The BC only interferes in situations considered to be dysfunctionality, such as extreme volatility or currency crises. Among the instruments that the BC uses to intervene are:
- Direct sale of dollars on the spot market, as a way of making up for the lack of supply and balancing the currency exchange rate;
- Currency swap contracts, which act as protection for companies and investors that have debt or operations in dollars, without the need to touch international reserves.
Between 2013 and 2018, for example, the Central Bank spent six years without selling dollars on the spot market. This changed drastically from 2019 onwards, when the monetary authority began to intervene more frequently due to several factors, such as the drop in the Selic rate and political instability.
Bolsonaro government: 113 interventions and US$ 74 billion sold
According to the portal UOL, during the government of Jair Bolsonaro, the Central Bank (BC) carried out 113 interventions in the foreign exchange spot 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 the period.
The main reasons given include:
- Fall in interest rates (Selic): In 2019, Brazil reduced its interest rate from 6,5% to 4,5%, making the local market less attractive to foreign investors. This led to an outflow of capital, putting upward pressure on the dollar.
- COVID-19 pandemic: The global health crisis that began in 2020 brought strong instability to the financial markets. The Central Bank had to act to prevent an even greater devaluation of the real against the dollar
- Electoral volatility: In 2022, an election year, the Central Bank intervened 11 times between September and December, totaling US$13 billion in sales. These operations occurred amid fears of political instability
Lula government: a single intervention so far
In 2023 and 2024, the stance of the central bank changed significantly. During the first year of Lula's government, no direct intervention was made in the spot market. In September 2024, however, the BC sold $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 at the end of 2022, due to sales under the Bolsonaro government. In September 2024, reserves were at US$360 billion.
- Fiscal risk scenario: Economists believe that the main factor behind the dollar's rise at the moment is the perception of risk in relation to public debt, which affects investor confidence.
Currency swap contracts: a complementary tool
Another important indicator is the balance of foreign exchange swap contracts, which also reflects the Central Bank's actions in the exchange rate. During the Bolsonaro government, these contracts rose 46%, from US$68,8 billion to US$100 billion. During the Lula government, the increase was more modest, of only 2%, reaching US$102,8 billion.
Why are the strategies so different?
Differences in exchange rate policies reflect the economic scenarios and priorities of each government.
- In the Bolsonaro government, the pandemic and political instability have required a more aggressive stance to contain market volatility.
- In the Lula government, macroeconomic conditions, although challenging, allowed a more cautious approach, focused on maintaining reserves and using less invasive instruments
Are international reserves still sufficient?
International reserves, which today total around US $ 360 billion, are an important buffer against exchange rate crises.
However, its reduction over the years has raised concerns. Economists point out that selling dollars, although necessary at times, cannot be a long-term solution to the economy's structural problems.
What is the future of Central Bank interventions?
With the dollar rising again and close to R$6, pressure is growing for the Central Bank to intervene in the exchange rate again. Despite this, analysts point out that specific measures do not solve problems such as fiscal distrust.
“Improving fiscal policy is the most effective way to stabilize the exchange rate,” says José Ronaldo de Castro Júnior, professor at Ibmec-RJ
And you, do you think the Central Bank should intervene more frequently in the exchange rate or remain cautious?
I believe that the rise of the dollar is tainted by the policy of foreign interests, such as seeking a new reduction in investments in order to curb the competitiveness of Brazil and China, which, as partners, currently have a position that can curb Trump's nationalist and isolationist voracity. For this reason, it should not intervene in the market yet. It is better to wait for the reality of the first actions of the Trump administration.