With Brazil's annual inflation climbing to 8.2%, the Banco Central do Brasil (BCB) faces a critical policy challenge. Over the past year, the Brazilian real (BRL) depreciated by approximately 18% against the US dollar. This substantial depreciation has escalated concerns, especially since many Brazilian businesses hold substantial dollar-denominated liabilities. To mitigate these risks and preserve financial stability, the BCB has frequently intervened in foreign exchange markets to limit 'excessive volatility or depreciation of the Brazilian real' and reassure international portfolio investors.
In recent weeks, consumer price index growth slowed to 0.3% month-on-month, down from 0.7% previously. Following a 2.25 percentage point increase in the Selic (the benchmark interest rate) by the BCB, the real staged a partial recovery, appreciating by 6.5%. However, the government is anxious to avoid prolonged high borrowing costs, which could stifle industrial investment and consumer spending, especially given a projected domestic economic slowdown.
Over the longer term, Brazil's GDP growth is projected to stabilize at around 3.2% annually, compared to Latin American peers such as Argentina (1.2%) and Colombia (2.8%). This growth, driven by commodities and agricultural exports, remains highly sensitive to global financial shocks and sudden shifts in investor risk appetite.
Explain how the Banco Central do Brasil (the central bank) intervenes in the foreign exchange market to prevent 'excessive volatility or depreciation of the Brazilian real' (Extract A).
40 exam-style questions on Edexcel A A Level Economics 4.1.8 Exchange rates. Each one has a worked solution and a mark scheme showing where the marks go.