June 13, 2016 / 8:52 PM / 2 years ago

UPDATE 1-Brazil central bank to cut exposure to some currency instruments

By Alonso Soto and Marcela Ayres

SAO PAULO, June 13 (Reuters) - Brazil’s new central bank president said on Monday that the bank will curb exposure to some currency derivatives as it seeks to moderate its use of the tools his predecessor employed to ease currency swings.

Ilan Goldfajn said at his swearing-in ceremony in Brasilia that the use of instruments to mitigate large fluctuations in the Brazilian real “will be made with parsimony.”

Goldfajn, 50, who quit as chief economist of Itaú Unibanco Holding SA to join the central bank, also suggested that monetary policy, and not the exchange rate, should be used to slow inflation.

Aiming at the mid-point of the central bank’s inflation target range should help speed up Brazil’s economic recovery from the harshest recession on record, he added.

The bank currently targets 4.5 percent inflation with leeway of plus or minus two percentage points.

Goldfajn faces the task of curbing price increases that are more than twice this year’s target even as Latin America’s largest economy struggles with a two-year recession. The central bank missed its inflation target during the five years of Goldfajn’s predecessor, Alexandre Tombini.

During Tombini’s five-year stint, policymakers at the central bank pursued an active currency policy that kept the real artificially strong for years. By 2015, the bank had built up a stock of more than $100 billion worth of currency swaps, which function like dollar sales to investors but cost taxpayers dearly when the real declines.

In recent months, the central bank has used reverse currency swaps to sharply reduce the stock of swaps, now at a little over $60 billion.

The currency slipped almost 2 percent to 3.4828 reais late on Monday afternoon.

At the ceremony, Goldfajn nominated Reinaldo Le Grazie, chief executive of Banco Bradesco SA’s asset management unit, to be the central bank’s director of monetary policy. (Writing by Guillermo Parra-Bernal and Brad Haynes; Additional reporting by Bruno Federowski in São Paulo; Editing by David Gregorio)

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