By 1993–1994, Brazil had lived through repeated failed stabilization efforts and very high inflation, which undermined wages, savings, and long-term contracts. This crisis set the stage for a new approach that focused on breaking inflation “inertia” (prices rising partly because everyone expects them to). The Real Plan emerged as the most comprehensive attempt to restore a workable monetary system.
A key Real Plan phase introduced the URV (Unidade Real de Valor), a non-cash unit of account that coexisted with the old currency for pricing and contracts. Because the URV was updated daily, it helped detach prices from past inflation and reduced automatic “indexation.” This transition mechanism aimed to coordinate price-setting before launching the new currency.
Brazil introduced the real as its new currency, converting 1 URV into 1 real and beginning nationwide circulation of new notes and coins. This was the central monetary milestone of the Real Plan, designed to anchor expectations and rapidly lower inflation. Inflation fell sharply after the launch compared with the pre-plan period.
To support disinflation, Brazil operated a managed exchange-rate system in which the real was allowed to move within bands set by the central bank. This framework acted as a “nominal anchor” by limiting currency depreciation, but it also made policy vulnerable to external shocks and capital outflows. Over time, defending the band required high interest rates and reserve losses when markets came under pressure.
Brazil created the Monetary Policy Committee (Copom) inside the central bank to make interest-rate decisions through a regular, more transparent process. This institutional change mattered because the Real Plan increasingly depended on credible monetary policy to keep inflation low. Copom later became central to the inflation-targeting regime adopted after the float.
After market stress intensified in 1998, the IMF approved a large stand-by credit package for Brazil (about US$18.1 billion from the IMF component). The program was meant to support Brazil’s economic and financial plan and help stabilize confidence during a period of falling reserves and high interest rates. The broader international package also involved other multilaterals and bilateral support beyond the IMF’s own credit.
With capital outflows rising, Brazil loosened its exchange-rate controls by removing the tight “mini-band,” allowing a sharper devaluation within a wider band. The move reflected how difficult it had become to sustain the previous exchange-rate strategy without further draining reserves. Markets treated the shift as a sign that a full move away from the band could be near.
Brazil stopped defending the band and allowed the real to float, meaning the exchange rate was set mainly by market supply and demand. The currency fell quickly, showing how much pressure had been building under the earlier regime. This was the turning point from an exchange-rate-based stabilization approach toward a framework that relied more on domestic monetary policy rules.
After the float, Brazil submitted an updated economic policy program to the IMF to adapt commitments to the new exchange-rate system. The shift required a replacement “anchor” for expectations, because the exchange rate was no longer tightly managed. The updated program emphasized fiscal and monetary measures intended to restore stability after the abrupt regime change.
Brazil formally adopted inflation targeting as its monetary-policy regime through Presidential Decree No. 3,088. Under this system, the government sets an inflation target (with a tolerance band), and the central bank adjusts interest rates to steer inflation toward that target. Inflation targeting provided a clearer policy framework to replace the exchange-rate band as the main guide for expectations.
Brazil enacted the Fiscal Responsibility Law, setting rules designed to limit unsustainable spending and improve fiscal transparency across levels of government. This mattered because a floating exchange rate and inflation targeting work better when public finances are credible and debt dynamics are controlled. The law became a key part of the broader macroeconomic framework that supported the post-float regime.
In 2002, Brazil faced renewed market stress ahead of the October presidential election, with concerns about debt, external conditions, and policy continuity contributing to capital outflows and real depreciation. The IMF announced a large stand-by credit (about US$30.4 billion) aimed at stabilizing confidence and supporting Brazil’s program through late 2003. This episode underscored the new reality of a floating currency: the exchange rate could move sharply, but policy credibility and support mechanisms became central tools for managing crises.
Brazil: Real Plan and the Real's Float (1994-2002)