10th January 2011
The government has also raised taxes for foreign investors in its fixed income markets in recent months.
The moves are a demonstration of how far Brazilian economic policy has matured since the days when Latin America was a byword for economic mismanagement. The trouble is, this economic prudence – like the actions of a coy mistress – only increases the ardour of international investors. Are these measures likely to work to cool Brazil's economy? Or will 2011 be the year when everyone is fretting about a bubble in Brazil rather than China?
The Daily Telegraph's story was greeted with some scepticism: Geoffrey Woollard responded, saying: "The move is Brazil's third since October aimed at discouraging "hot money" from chasing the real higher and so undermining the nation's competitiveness in the face of a weak dollar." It's called p*****g against the wind." In other words, Brazil will struggle to fight the tidal wave of international interest.
Certainly, the fact that the Brazilian authorities have had to repeat their intervention does not bode well. Dilma Rousseff, the newly appointed successor to outgoing president Luiz Inácio Lula da Silva, has said that preventing inflation is her biggest economic challenge . Consumer price inflation is running at around 6%, against government targets of 4.5%.
But Brazil is not China. For a start, it has not seen the growth rates of China. The latest IMF report has relatively tame growth figures of 7.1% for 2010 and 4% for 2011. It has not seen similar credit expansion and it is not the natural home for the excess cash generated by loose monetary policy in the US. Also, inflation is a side-effect of genuine economic growth – Brazil's manufacturing capacity use is near record highs and unemployment is at near record lows – rather than in, say, the UK, where it is being created by a series of anomalous external pressures and tax rises.
Brazil also raised its interest rates a number of times in 2010 – the government is determined to use every policy measure possible to ensure that the economy does not move into bubble territory. This is in contrast to the slowly-slowly approach being employed by the Chinese government that may yet prove to be not quite quick enough.
Equally, although it may have taken some time, the real saw an immediate depreciation after this latest move.
The biggest worry for investors may be the relatively strong performance of the Brazilian market in 2010. China at least has the cushion of weak stock market growth as investors fretted about inflationary pressures. Brazil has been everyone's darling and these issues, whether justified or not, may start to weigh on markets where there is not much room for manoeuvre.