Brazil: Real tumbles on political tensions and rapid inflation
The Brazilian real tumbled against the U.S. dollar in recent weeks, hitting an over five-month low in early October. On 7 October, the currency traded at BRL 5.52 per USD, which marked a 6.3% depreciation from the same day a month prior, while it was down 5.9% year-to-date. Nevertheless, the real was still up 1.7% in year-on-year terms, having depreciated around 30% during 2020.
The sharp drop has coincided with a number of contributing factors. Foremost has been the increase in political tensions, with President Bolsonaro having ramped up his anti-democratic rhetoric of late, culminating in a series of pro-government rallies in early September at which the president continued his attacks on the supreme court and cast doubt over his willingness to accept the results of next year’s keenly-anticipated elections should he lose. Bolsonaro currently trails former President Luiz Inácio Lula da Silva in polls, having seen his popularity fall to an all-time low on the back of his handling of the coronavirus crisis and rising inflation. While the president has dampened down his rhetoric in recent weeks, the political noise has been enough to slow the progress of the economic agenda through Congress, with the risk of breaching the spending cap next year increasing markedly. Moreover, inflation has been steadily rising throughout the year, spiking to over 10% in September. While the Central Bank has raised rates by a combined 425 basis points since February, market opinion that the Bank is not taking enough of a hawkish stance has only added downward pressure to the real.
Going forward, the currency looks set to regain some ground by year-end as political noise dissipates somewhat, before depreciating again throughout 2022. However, there are significant risks to the downside if the fiscal outlook deteriorates and inflation continues to rise despite monetary policy tightening.