What action could the bcb take in the fx market to affect

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Reference no: EM133483348

Case: Brazil traditionally is considered to be the largest economy in Latin America. As a result the health of the Brazilian economy is often used as a bell weather for the continent in general. Thus the actions of the Banco Central do Brasil (BCB - the country's central bank) are closely monitored in the financial press.

The BCB has an inflation target of 3.25% percent for 2023 and 3% for 2024 & 2025. This inflation target has put the BCB at odds with the country's president who has publicly pushed for higher inflation targets. Last month the country's inflation rate was 5.77%, and the interest rate set by the BCB was 13.75%.

Much of the in country price increases are the result of higher transportation (oil) and food import costs.

Question 1: What action do you think the BCB should take with regard to interest rates? Why is this the case?

Question 2: Given that much of the price growth is due to import costs, what action could the BCB take in the FX market to affect the value of the Brazilian Real? The Real currently trades at 1 CAD = 3.91 BRL.

Reference no: EM133483348

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