SAO PAULO: Higher interest rates will likely prevent Brazil's currency, the real, from weakening much further, a government source told Reuters on Friday, as investors eyeing higher returns buy the currency.
"The rate hike tends to mitigate (the currency drop)," the source said. "There is a huge factor (influencing currency markets), which is the United States ... We have to wait and see what is going to happen," the source added when asked whether the recent currency drop will fuel inflation.
The central bank intervened in currency markets on Friday by selling currency swaps after the real fell more than 1 percent against the dollar.
Brazil's central bank raised its benchmark Selic rate by 50 basis points to 8 percent on Wednesday despite data showing disappointing economic growth in the first quarter.
The increase, which surprised the many investors expecting a smaller move, should help restore consumer and business confidence in the central bank's ability to keep prices under control, according to the source's comments.
The source, who declined to be named, reiterated prior government statements that inflation will ease, moving toward the center of the government's target of 4.5 percent starting next year.
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