Brazil Has ‘No Reason’ to Raise Currency Reserves, Freitas Says

Brazil should stop increasing international reserves as the local currency stabilizes and economic growth quickens, former central bank director Carlos Eduardo de Freitas said.

“It’s a totally logical moment for the central bank to stop buying reserves,” Freitas, who was part of the central bank’s monetary policy committee from 1999 to 2003, said in a telephone interview from Brasilia.

Brazil’s real lost 1 percent against the dollar in the fourth quarter, curbing this year’s gain to 30 percent, the best performance among all major currencies tracked by Bloomberg. Freitas said the Brazilian real probably will stabilize around the current level. The real opened little changed at 1.7839 per dollar at 6:02 a.m. in New York, from 1.7846 yesterday.

Foreign currency reserves grew by $32.1 billion this year to $238.9 billion on Dec. 18, according to central bank data. Reserves reached a record $239.45 billion on Dec. 2.

“If they don’t stop buying reserves now they will be paying a high cost for no reason,” Freitas said, referring to the interest rate differential between Brazil and the U.S.

Brazil’s benchmark overnight rate is at a record low of 8.75 percent while the U.S. interest rate is under 0.25 percent. Brazil’s gross domestic product quarterly growth quickened to 1.3 percent in the third quarter from 1.1 percent between March and June, according to the national statistics agency.

Brazil’s policy to increase currency reserves also “lowers investor’s risk artificially,” according to Freitas, now a partner at consulting firm OF Consultoria Economica. “This is very bad for a market economy. Investors take on too much risk and make disastrous decisions.”