BRASILIA, Oct 19 (Reuters) - Brazil's central bank on Tuesday made its first intervention in the spot currency market since March, pulling the real back from the brink of a six-month low due to fresh concerns about looser government spending ahead of next year's election.
The government is preparing an expanded welfare program next year, a person with knowledge of the plans told Reuters, with part of the program counted outside of a constitutional spending cap, which investors have used as a gauge of fiscal discipline.
Newspaper O Estado de S.Paulo reported that welfare program could cost around 90 billion reais ($16 billion), with a third of it counted outside the spending cap. A columnist at O Globo reported that 50 billion reais would be counted outside the cap.
The reports stoked fears that far-right populist President Jair Bolsonaro would loosen fiscal controls and ramp up spending to recover his sliding popularity ahead of a re-election bid.
The Economy Ministry did not immediately respond to a request for comment.
The benchmark Bovespa stock index fell nearly 2% and the real slid almost 1%, testing a six-month low before the central bank's intervention helped to pare losses.
The central bank sold $500 million in the spot auction after a week of expanding currency swap sales that have failed to prop up the real, which is down about 30% against the dollar so far this year. Investors in the currency have been spooked by political risks, a fragile economic recovery and the prospect for rising interest rates in more wealthy economies.
Those concerns came into clearer focus on Thursday, with growing rate-hike bets in markets such as Britain, where a cumulative rise of 35 basis points has been priced in by the end of the year.
Brazil's central bank has already raised interest rates by 4.25 percentage points this year to fight double-digit inflation and signaled 100-basis-point hikes at upcoming meetings, while stressing the need for continued fiscal discipline.
The government is facing growing political pressure to spend more, however, as an economic recovery sputters, with unemployment stuck near 14% and poverty soaring.
In an interview published late on Monday by news magazine Veja, Arthur Lira, the speaker of the lower house of Congress, defended new social spending outside the spending cap limit.
Lira told Veja that the COVID-19 pandemic's terrible impact in Brazil, home to the world's second-highest death toll from the virus after the United States, meant that fiscal responsibility could not be prioritized over the urgent needs of the most vulnerable.
$1 = 5.5504 reais Reporting by Marcela Ayres in Brasilia and Jose de Castro in Sao Paulo Writing by Gabriel Stargardter Editing by Brad Haynes and Paul Simao