BCB's Tombini to work with Rousseff economic team, as Barclays sees signaling

- Thursday, January 6, 2011

BCB's Tombini to work with Rousseff economic team, as Barclays sees signaling

Brazilian central bank BCB will continue to work with the economic team of newly installed President Dilma Rousseff on issues such as exchange rates, the bank's new head, Alexandre Tombini, told a press conference Thursday, which Barclays finds as evidence of signaling of more measures to come.

The announcement of a new reserve requirement for banks that short the US dollar against the Brazilian real (BRL) helped depreciate Brazil's currency during the day, as Tombini defended the move, saying that the US$16.8bn short position that banks have taken seemed out of line given that the local spot FX market stood at only US$2bn.

Finance minister Guido Mantega, who earlier in the week said he would not allow the dollar to "melt," told a separate press conference Thursday that he approved of the measures and that it was a way of taking the profitability out of over-exposure to the FX market.

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Asked about the relation with Rousseff's economic team, Tombini said that he had talked about many different measures with the finance ministry, and that they would continue to work together on important issues - such as Basel III and other macro-prudential measures like those introduced in early December - in this period of large capital flows and liquidity.

Tombini heads to Switzerland on Friday (Jan 7) for meetings at the Bank for International Settlements (BIS).

"We believe [the measure on Thursday] should be seen as the first of a series of measures that the new administration will use to contain short-term capital inflows into Brazilian financial markets," wrote economist Marcelo Salomon of Barclays Capital.

"Finance minister Mantega stated earlier this week that the government has unlimited power to contain the BRL appreciation and could even resort to short-term capital controls. He did not give any details, but this raises the possibility that quarantine-like measures imposing significant costs to short-term capital flows could also be part of the intervention toolkit."

HOUSING CREDIT

Tombini also took a question on housing credit during his first press conference since taking his new post at BCB on Monday (Jan 3), comparing it to general consumer credit growth, which he said should see continued expansion, but at more moderate rates.

"It's natural that a country with pent-up demand of 6mn housing units will see this credit segment grow [quite quickly], while keeping price stability," the BCB head said of the more than 50% year-over-year increase in the stock of housing credit, noting that the base was quite low compared with more developed countries.

However, BCB will monitor the growth in this segment carefully, he concluded.