Brazil’s currency strengthens despite inflation

Sao Paulo, Apr 8 (EFE).- Inflation in Brazil is running at 11.3 percent, yet the Brazilian real continues to climb against the dollar thanks to steep domestic rates and the global rally in commodity prices connected with the Russian invasion of Ukraine.

The real has increased in value by 16 percent so far this year and is trading at less than 5 reais to the greenback for the first time since before the start of the Covid-19 pandemic in February 2020.

Brazil’s Central Bank began raising the benchmark interest rate in mid-2021 and it currently stands at 11.75 percent, the highest in five years.

And while the bank’s board says it expects to boost the rate to 12.75 percent by the end of the year, market-watchers expect that inflation will force the directors to push the rate to 13.25 percent.

Another major factor bolstering the real is the worldwide surge in prices of energy, food, and other commodities as a consequence of the war in Ukraine and the Western sanctions against Russia.

Ukrainian and Russian wheat together account for nearly 30 percent of global exports of the grain, while Russia is a leading oil and gas producer and key source of fertilizer.

“The real is a currency very much linked to the prices of raw materials and that increase in the value of basic goods contributes to that appreciation (of the real),” Flavio Serrano, chief economist of asset manager Greenbay Investimentos, told Efe.

Besides disrupting supply chains, the Western sanctions against Moscow have spurred foreigners with business interests in Russia to seek safe havens.

“The problem in Russia is resulting in a part of the resources and investors who were there are going out in search of other places, and Brazil offers an interesting differentiator because of the higher interest rates,” Serrano said.

The flip side of the commodities surge benefiting the real is the impact of higher prices on Brazilian consumers.

Gasoline prices at the pump soared 6.95 percent in March, according to a report released Friday by the Brazilian Institute of Geography and Statistics (IBGE).

Brazil’s seventh consecutive month of double-digit inflation also saw a 2.42 percent increase in the cost of food, the IBGE said, pointing to higher prices for fruit and vegetables, milk, and bread.

EFE

nbo-mat/dr