By Marcela Ayres, Gabriel Araujo
SAO PAULO/BRASILIA (Reuters) -Market anxiety dragged Brazil’s real currency to a historic low on Monday as significant central bank interventions again failed to counter market concerns over government spending.
The real closed at 6.09 per U.S. dollar, with a year-to-date depreciation shaving off a fifth of its value, making it one of the worst performers among emerging market currencies.
Interest rate futures continued to rise, with bets that the central bank will hike its key borrowing rate again in January, likely by 125 basis points instead of 100 bps under its recent guidance.
The real opened sharply lower against the U.S. dollar as President Luiz Inacio Lula da Silva renewed criticism of what he sees as unreasonably high borrowing costs. The currency briefly pared losses after central bank interventions, before resuming its downward spiral.
In an interview with major television broadcaster Globo, aired late Sunday, the leftist leader dubbed the rate hikes “irresponsible” and said his government would “take care of that,” hinting at potential policy changes ahead.
Next year, the central bank’s rate-setting board will have a majority of members chosen by Lula, as the president is commonly known, including his pick for governor.
The Brazilian currency’s steep decline was triggered last month by market disappointment over a much-anticipated government spending cut package.
Congress has yet to vote on the package a week before a scheduled recess. Even so, Finance Minister Fernando Haddad expressed optimism on Monday that approval for the package can be secured within this time frame.
Earlier in the day, the central bank announced a spot dollar auction that sold $1.63 billion, a move it had also deployed on Friday. The bank also sold the full $3 billion in an auction with repurchase agreements that it had announced on Friday.
Despite the efforts to boost the real, market sentiment remained sour after the central bank’s rate hike earlier this month to bring the benchmark rate to 12.25%, while it signaled matching moves for the next two meetings.
“The only thing wrong in this country is the interest rate being above 12%. There’s no explanation,” said Lula, who was discharged from hospital on Sunday morning following emergency surgeries to treat and prevent bleeding in his head.
Lula argued that inflation of around 4% is “fully controlled.”
The central bank’s hawkish move this month cited the market’s negative reception of the fiscal package as a factor likely to pressure prices upward, with inflation expectations already drifting away from the bank’s 3% target, plus or minus 1.5 percentage points.
A weekly bank survey of private economists released on Monday continued to point to higher inflation expectations moving into next year. Economists surveyed see the interest rate peaking at 14.25% in March.
Brazil’s 12-month inflation ended November at 4.87%.
Lula has repeatedly criticized what he sees as excessively high interest rates, often slamming outgoing central bank governor Roberto Campos Neto. The president has tapped Gabriel Galipolo to replace him.
Next year, Lula’s appointees will hold a 7-2 majority on the bank’s nine-member rate-setting committee, up from the current 4-5 minority.
(Reporting by Marcela Ayres and Gabriel Araujo; Editing by Gareth Jones and Chizu Nomiyama and Richard Chang)
