Galípolo Signals Caution on Forex Intervention in Meetings with Investors

Gabriel Galípolo, the Central Bank’s director of monetary policy, reassured investors that any decision on foreign exchange intervention would need full board support.

In recent meetings, Galípolo emphasized the importance of consensus before taking action to address the rising dollar.

This approach reflects Galípolo‘s strategy to avoid political pressures, which is critical as he is likely to become Central Bank president after Roberto Campos Neto’s term ends in December.

Galípolo faces the challenge of balancing President Lula’s demand for action against market concerns about Lula’s influence over the Central Bank.

The dollar’s nearly 11% rise this year has made it the worst-performing emerging market currency after the Argentine peso.

Some relief came last week when Lula ceased commenting on the exchange rate and the government announced spending cuts.

Intervention decisions typically involve the monetary policy director and the Central Bank president.

The floating exchange rate is the regime, and the Central Bank should intervene during liquidity shortages or price formation issues. For years, the president had to approve any action.

However, the pandemic granted the monetary policy director autonomy to conduct forex operations using up to 5% of Brazil’s international reserves, now nearly $360 billion.

This autonomy remains today, though limited to 2.5% of reserves. Galípolo signaled that he would still seek consent from senior bank members.

Central Bank’s Stance Amid Market Stress

Publicly, Central Bank members attribute market stress to “short-term noise,” pointing to fiscal and monetary uncertainties without hinting at intervention.

Lula, however, has claimed abnormal speculation. The Central Bank maintains no specific exchange rate target, but sustained dollar appreciation increases import costs, pressuring inflation.

In cases of liquidity shortages or market dysfunction, the bank can announce foreign exchange swaps or buy and sell dollars in the spot market.

Tensions between Lula and the Central Bank may rise after the Copom paused a year-long monetary easing cycle without signaling rate cuts.

Galípolo voted to keep the Selic rate at 10.5%, having previously favored a larger cut.

Traders anticipate potential interest rate hikes due to dollar pressure, raising inflation estimates above the Central Bank’s 3% target.

Persistent inflation could make another rate-hike cycle inevitable. Amid the real’s depreciation, selling dollars could reassure foreign investors and encourage capital inflows.

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