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By Jamie McGeever
BRASILIA, April 20 (Reuters) – Brazil’s central bank president Roberto Campos Neto on Monday poured cold water on the prospect of widespread bond buying to help cushion the economy from the coronavirus crisis, saying any action will be similar to its foreign exchange intervention in times of acute market stress.
Speaking in a live online debate hosted by Estadao, Campos Neto said Brazil is not at the stage where money printing “quantitative easing”, or QE, would be considered, and expressed doubt that it would work in an emerging country.
Campos Neto said the bank’s bond-buying will be aimed at filling liquidity gaps and ensuring smooth market functioning, rather than flattening the yield curve and reducing longer-term borrowing costs per se.
His comments back up sources, including two of his predecessors Arminio Fraga and Henrique Meirelles, who told Reuters that private and public sector asset purchases will likely be targeted initially, like its dollar sales.
Campos Neto noted that the central bank intervenes in FX markets when the Brazilian real depreciates relative to currencies of nations with similar economic fundamentals, when large liquidity gaps appear, or when the market is disorderly.
“Our aim with long term interest rates is the exactly same – enter the market in periods of dysfunction … not to force the long end (rates) down, but to make sure it doesn’t rise in a disorderly manner,” Campos Neto said.
Brazil’s central bank has the power to buy financial assets on secondary markets for monetary policy and money supply management purposes. Congress is set to give it emergency powers to buy them in times of national emergency or economic crisis.
Campos Neto said there are various options on the table of what the central bank’s asset purchases will look like. Buying firms’ bonds and debentures could be done via auction, he said.
But he pointed out that traditional QE tends to be more common and effective in countries where central banks’ official interest rate is already close to zero, but policymakers need to do more to stimulate the economy.
The benchmark Selic rate is a record low 3.75%, and widely expected to go lower. Campos Neto did not disavow that suggestion in the discussion, but made a point of noting the Selic is not at the ‘zero lower bound’.
“That is not where we are today. Not only do we not know when that might be, we aren’t sure if it will work in a country like Brazil. The monetary policy mix in emerging markets is different than it is in developed economies,” he said. (Reporting by Jamie McGeever; Editing by Sandra Maler and Lincoln Feast.)
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