BRASILIA, Feb 13 (Reuters) - Brazil is prepared to use international reserves if needed to curb volatility in the foreign exchange market, central bank president Alexandre Tombini said in an interview published on Thursday by a local magazine.
The central bank will also use its toolkit to lower inflation and keep it under control, Tombini added, according to the business magazine Exame.
The bank’s monetary policy committee Copom is widely expected to raise interest rates for an eighth straight time on Feb. 26. But it has already given signals that it could slow down the pace of rate hikes as inflation has dropped to its lowest in over a year and economic activity sputters.
“Brazil’s response (to global volatility) has been classic and robust. We started to tighten monetary policy by raising interest rates in April, before the U.S. central bank indicated it would taper stimulus,” Tombini told Exame.
“As for the exchange rate, we accumulated international reserves and we may use that cushion to smooth out adjustments and reduce the impact of currency depreciation over the real side of the economy.”
The central bank confirmed that Tombini gave the interview.
Brazil has managed to smooth out currency volatility over the past few months without burning any of its vast $377 billion reserves, offering currency swaps and repo lines instead. Still, the real has lost nearly 20 percent of its value over the past year and is currently trading near five-year lows at 2.4282 per dollar on Thursday.
Asked about what the government needs to do to control inflation, the U.S.-trained economist said: “the central bank will adjust the instruments it has to bring inflation down and keep it under control. But we depend on the external outlook.”
Despite the recent instability, Tombini said the normalization of monetary conditions in other countries is positive for the world economy. “This is part of the process. We cannot mistake adjustment with fragility.”
Tombini also reiterated that tighter fiscal policies help monetary policy, but noted it is up to the government to decide on that. Brazil is considering lowering its 2014 budget target as a severe drought pushes up energy costs, a senior official told Reuters on Wednesday. (Reporting by Patricia Duarte; Writing by Silvio Cascione; Editing by Rosalind Russell)