Brazil's incoming central bank chief signals 'higher rates for longer,' no change in FX policy

By Marcela Ayres

BRASILIA, Dec 2 (Reuters) - Brazil's incoming central bank chief said on Monday that the current scenario points to "higher interest rates for longer," while also emphasizing continued exchange rate policy focused on intervening only during times of dysfunction.

Speaking at an event hosted by brokerage XP, Gabriel Galipolo said it seemed "logical" for an economy that has been showing greater dynamism and tightness than anticipated, alongside a weaker domestic currency, to "require a more contractionary monetary policy."

Amid recent market volatility following a government fiscal package accompanied by an unexpected income tax reform proposal, Galipolo said the central bank would not provide monetary policy guidance, especially so close to its next meeting.

"Much more important for us is to move in the right direction," said Galipolo, who currently serves as the central bank's monetary policy director. "There are several ways to reach the inflation target."

Policymakers are set to meet on Dec. 10-11, after initiating a tightening cycle in September that has so far pushed interest rates to 11.25%.

The government's announcement of the fiscal package led to a sharp depreciation of the Brazilian real and higher interest rate futures in recent days, with economists polled by the central bank now estimating borrowing costs to peak at 13.25% next year.

Markets had been expecting only spending containment measures to support a fiscal framework passed by President Luiz Inacio Lula da Silva's administration last year.

The local currency on Monday weakened more than 1% against the U.S. dollar, extending its year-to-date decline to over 20%, which contributes to inflationary pressures.

Galipolo, who in his current role oversees the bank's foreign exchange desk, said he expects the policy of intervening in the currency market only during times of dysfunction to continue under his successor.

Leftist Lula has chosen lender Bradesco's head trader Nilton David for the position starting in January, when Galipolo's term as governor begins. David's nomination must still be confirmed by the Senate.

"I don't foresee any major changes in exchange rate policy with the new director," Galipolo said, adding that the floating exchange rate was "performing its role very well."

Many members of Lula's Workers Party have insisted on the need for currency intervention to ease the depreciation of the Brazilian real. (Reporting by Marcela Ayres; Editing by Gabriel Araujo)