Monetary authority sold $21.574bn in the spot market and $11bn in line auctions
01/06/2025
Currency interventions conducted by Brazil’s Central Bank in December decreased international reserves by $33.3 billion in one month, bringing the total to $329.7 billion by the end of 2024. At the end of November, the reserves level was $363 billion. Despite this decline, experts say the volume is still comfortable.
The level reached at the end of last year is lower than the $355 billion recorded at the end of 2023 but higher than the $324.7 billion in 2022. These are nominal values. Silvio Campos Neto, senior economist and partner at Tendências Consultoria, described December’s drop as “significant,” noting that reserves remain healthy. However, he cautioned that the rapid decline is a warning for the coming months.
“There was a strong intervention in the foreign exchange market in December, and it was not enough to reverse the pressure, indicating that the source of this movement is not entirely related to market dysfunction or a temporary dollar scarcity; it is more structurally linked to increased risk perception about Brazil,” he explained.
In December, the monetary authority held nine spot dollar auctions and five “line” auctions (with a repurchase agreement), totaling $32.574 billion. That included $21.574 billion in spot sales and $11 billion in line auctions. Looking at the volume of reserves, Danilo Igliori, chief economist at Nomad, also emphasized the level is comfortable. He noted that concerns could arise if the crisis seen in December escalates in 2025. “I don’t think that’s the scenario. It was an evident moment of stress, and the Central Bank responded well.”
Silvio Campos Neto from Tendências explained that the interventions were the main reason for the reserve reduction but also highlighted the impact of rising market interest rates in the United States. “That also affects the value as it reduces prices, especially U.S. bonds, which make up most of the reserves.”
The Central Bank stated that there is no consensus on the best metric to define the “optimal level” of reserves but indicated that periodic internal evaluations show Brazil is aligned with practices of similar countries.
In a press conference on December 19, the then-Central Bank president, Roberto Campos Neto, said the monetary authority was operating in the foreign exchange market as usual. He pointed out that the monetary authority intervenes whenever it perceives market dysfunction. Mr. Campos Neto also noted an unusually large flow at the end of 2024, with an above-average outflow of dividends as one of the reasons.
Fiscal concerns also influenced the exchange rate’s movement. At the end of November, the government announced measures that were poorly received by the market. The package was unveiled alongside a proposal to exempt those earning up to R$5,000 from income tax, which raised concerns and impacted interest rates and the exchange rate.
The National Congress approved the fiscal project in December, while the income tax proposal has yet to be submitted by the government to Parliament. The real continued to decline, closing 2024 with a 27.3% depreciation, at R$6.18 to the dollar.
Mr. Igliori from Nomad pointed out that December typically sees a higher dollar outflow, but the scale of the reserve drop is linked to stress regarding fiscal policy. “The auctions were significant, and yet the exchange rate moved considerably. It became clear that during December, we experienced a mini credibility crisis, and the impact on reserves was a consequence of the Central Bank’s management during this period through auctions,” he said.
Another factor in the end-of-year scenario was the tone of criticism from Workers’ Party’s (PT) members regarding the monetary authority’s actions. On the same day as Mr. Campos Neto’s press conference, PT President Gleisi Hoffmann posted on social media that the real’s depreciation in those weeks was a “speculative attack.”
In the press conference, the then director of monetary policy and current Central Bank president, Gabriel Galípolo, was asked about that possibility. He argued that the idea of a “coordinated speculative attack” did not represent market movements. Mr. Galípolo stated that “it’s not correct” to treat the market as a “monolithic block.”
The chief economist at Nomad said there is always pressure on the monetary authority and no reason to believe the new leadership will act unprofessionally. “I don’t see an inclination to introduce significant institutional uncertainty around the Central Bank’s autonomy, which has been hard-won.”
*By Gabriel Sinohara
Source: Valor International