Currency wars not over, says Brazil

Brazil is preparing a range of additional measures to stem the
damaging rise of the real as the global currency war shows no signs of
ending, according to Guido Mantega, the country’s finance minister.

Speaking
to the Financial Times in London, Mr Mantega said the Group of 20
leading economies was still a long way from achieving its goal of
agreeing new guidelines for managing currencies, there were “struggles
between countries” such as the US and China, and the global currency war
was “absolutely not over”.

Slow growth and low interest rates in
advanced economies continued to put upward pressure on Brazil’s
currency, Mr Mantega said, forcing the authorities to consider further
intervention in currency and derivatives markets to limit over-shooting.

“We
always have new measures to take,” he told the FT, indicating on the
sidelines of an investor conference that these would not be
pre-announced, but would include market intervention. On Tuesday, the
Brazilian central bank also announced a spot auction to buy US dollars
in another move to boost foreign exchange reserves and stem the upward
pressure on the real.

The Brazilian currency has been close to 12-year highs against the dollar in recent weeks, but fell by 0.7 per cent on Tuesday.

Brazil’s
actions to limit currency appreciation highlight the dilemma faced by
many fast-growing economies — including Turkey, Chile, Colombia, and
Russia — since allowing currency appreciation limits domestic
overheating, but also undermines the competitiveness of domestic
industry.

“I gave a speech to investors and I hope they did not
receive it too enthusiastically,” Mr Mantega joked, ” because there is a
tendency for too much capital to enter”.

Brazil had to take
other actions, he added, because domestic interest rates were already
high, so as to curb inflation, and further rate rises alone tended to
encourage further capital inflows. Brazil has already instituted a
number of measures, including taxing bond portfolio inflows, to try and
curb the real’s appreciation.

“Monetary policy is very tight in
Brazil and the level [of interest rates] in real terms is higher than in
other [emerging] countries,” Mr Mantega insisted.

With the main
policy rate at 12.25 per cent, he rejected the notion that Brazil was
overheating, saying the economic growth rates were sustainable,
inflation was falling and the fiscal deficit was coming down. The
economy is forecast to grow by 4 per cent this year after expanding 7.5
per cent in 2010.

Credit growth — at 15 per cent this year —
was lower than the 22 per cent rate in 2010, he added, partly as a
result of government restrictions on banks borrowing cheaply at low
interest rates from the US, but he looked forward to the day when lower
inflation allowed “monetary policy more flexibility”.

Mr
Mantega’s comments highlight the low-level currency war between emerging
and advanced economies that has unsettled global financial markets.
This will be one of the issues facing Christine Lagarde, who started
work as managing director of the International Monetary Fund on Tuesday.

Brazil
supported the new French managing director over her Mexican rival,
Agustín Carstens, but Mr Mantega insisted there was no “regional
rivalry” between Latin America’s two biggest economies. Mr Mantega said
he felt Ms Lagarde would be more effective at advancing the cause of
developing nations.