The government has made the dollar an unnecessary taboo.
The turning point between the Dilma and Lula governments was exchange rate policy. While the former president worked with a stronger real, Dilma's economic team embraced the discourse that it was necessary to devalue the currency to help the export sector. The result was more inflation, without greater growth. A correction is necessary, but there is no consensus. Yesterday, while Guido Mantega signaled a change of course, Fernando Pimentel continued to talk about the dollar at R$ 2, and the Central Bank acted in the wrong direction.
247 - In the second half of Lula's second term, the real reached its peak appreciation. Quoted at R$ 1,60, it triggered alarms in sectors that traditionally lobby for the permanent devaluation of the Brazilian currency and that repeated the same discourse: deindustrialization.
At that time, however, Brazil was growing at 7% per year, industry was advancing at double-digit rates, and inflation was easier to control than it is now, since the cheap dollar helped to keep prices down. Even so, Brazil continued to produce substantial surpluses in international trade.
However, with the departure of Henrique Meirelles from the Central Bank, there was a slight shift in economic policy. On the positive side, the Dilma government decided to tackle the "Brazil Cost" on several fronts, reducing interest rates, easing taxes on certain sectors of the economy, and, more recently, cutting energy tariffs.
The unnecessary change, however, occurred in exchange rate policy, where the government allowed itself to be swayed by lobbying from the export sectors and permitted a sharp devaluation of the real, which meant that, in the first two years of Dilma's government, the dollar was almost always quoted above R$ 2.
Treated in an almost dogmatic way, the exchange rate policy did not produce the desired results. Inflation remained closer to the upper limit of the target, the trade balance worsened, and growth was anemic because a devaluation almost always reduces the purchasing power of the population.
Yesterday, for the first time, signs emerged that the government might change the situation. A statement by the Finance Minister, Guido Mantega, in the right direction, fueled speculative activity. "Ideally, there would be no intervention, but that's a dream. Now, if there is a renewed speculative trend, if people get excited and say, 'Let's push this exchange rate to 1,85,' then we will intervene again." On the same day, however, a statement by the Development Minister, Fernando Pimentel, in the newspaper Valor Econômico, positioned the exchange rate at R$ 2 almost as a government target.
In yesterday's market session, investors began pushing the dollar towards the R$1,85 floor, as signaled by Mantega, but the Central Bank intervened and brought the exchange rate back down to near R$2. That was a mistake. In the current context, what Brazil needs most right now is a stronger real.