Brazilian ministry plans target for foreign reserves -sources

© Reuters. FILE PHOTO: A screen shows the Brazilian real-U.S. dollar and several other foreign currencies exchange rates in Rio de Janeiro, Brazil March 12, 2020. REUTERS/Sergio Moraes/File Photo

By Marcela Ayres and Bernardo Caram

BRASILIA (Reuters) - Brazil's Economy Ministry is studying a target for the country's substantial foreign exchange reserves, two sources told Reuters, as inflation remains the top concern of voters ahead of a presidential election.

The plan would set a target with a minimum and maximum amount of foreign currency Brazil should keep in its reserves, which currently totals $338.7 billion.

The plan for the floating bands is preliminary and subject to change or the government could decide not to pursue the idea, the officials said, requesting anonymity due to its sensitive nature.

The Economy Ministry and the central bank declined to comment.

Foreign reserve sales by the central bank help to contain the dollar's rise against the Brazilian real, easing inflationary pressures.

The central bank, which is autonomous from the federal government, has said that it only operates in the foreign exchange market when it identifies sharp volatility.

Spiking consumer prices are a major topic in Brazil ahead of the October elections, with President Jair Bolsonaro trailing leftist former President Luiz Inacio Lula da Silva in polls.

The target was first reported on Tuesday by the newspaper O Globo.

A target with floating bands would avoid political manipulation of the reserves, especially in an election year, one official said.

This would directly interfere with the exchange rate policy that is entirely the responsibility of the central bank.

The existence of such a plan surprised top-level technicians at the Economy Ministry, who said there was no agreement on a target for reserves. A central bank source criticized the idea, saying the exchange rate was "an external variable, you have no control over it."

"It's stupid," said Alexandre Schwartsman, a former central bank director. He said the currency reflects economic fundamentals and it makes no sense to control its fluctuation.

Lula has said he will not touch the country's foreign exchange reserves if elected.