Inflation, and Interventions in the Foreign Exchange Market?

BRAZIL ECONOMICS - Report 18 Oct 2021 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

For some time the financial market clung to the notion that the increase of the interest rate, necessary to bring inflation to the target, would attract capital, appreciating the Real and helping the Central Bank in its task. However, since the start of the monetary tightening cycle in March, this expectation has not come to pass. Although between July and August the Real remained relatively stable, hovering around R$ 5.20/US$, it then began to weaken and last week reached almost R$ 5.60/US$, only returning to R$ 5.40/US$ (Graph 1) after the Central Bank carried out two interventions in the future market.

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