The Brazilian real weakened further against the dollar yesterday after the central bank confirmed its decision to let the currency float, earning a cautious welcome from equity investors.
The central bank said in a statement yesterday morning that it would continue to let the market decide the exchange rate. But it said it would intervene in an `occasional and limited form' if there were any `disorderly' movements in the currency.
The decision to maintain the floating rate comes after Brazil became the latest emerging economy to abandon a currency peg against the US dollar on Friday in the face of a new speculative attack which began last week.
Since August, reserves have fallen by more than $40 billion (€34.48 billion) in an attempt to defend the fixed-rate regime, which had been the centrepiece of the government's anti-inflationary strategy.
The real weakened yesterday 6 per cent to R1.53 (€1.16) to the dollar by mid-afternoon. However, share prices, which soared 33.4 per cent on Friday on news of the float, rose a further 4.2 per cent.
Investors continued to believe that the currency would quickly stabilise at a new rate, which would permit a return to growth in the second half of the year.
But Mr Pedro Malan, finance minister, said interest rates might even have to rise in the short term to stabilise the currency and to limit inflationary pressures from the devaluation.
Speaking in Washington after three days of meetings with officials from the International Monetary Fund and US government, he said that the burden of keeping prices down would now fall on monetary and fiscal policy, rather than a fixed exchange rate. Cutting the fiscal deficit was "priority number one", Mr Malan said.
Mr Malan admitted that the terms of Brazil's $41.5 billion aid package led by the IMF would need to be revised, but he said that the government was not seeking an early draw-down of the second tranche of money. Mr Michel Camdessus, managing director of the IMF, said in a statement that a delegation from the Fund would shortly be visiting Brazil to establish "a new macroeconomic and monetary structure" for the financial package.
