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Amid Growing Inflation Brazil Ups Taxes on Foreigners and Warns Against Currency War

Dollar invasion in BrazilBrazilian economists in a weekly central bank survey raised for a fifth straight week their forecasts for Brazil’s benchmark inflation index in 2010 and 2011, underscoring concerns that growth in the economy will raise consumer prices in the months ahead, the bank said. 

Experts forecast the benchmark IPCA inflation index at 5.20% for 2010, compared with the 5.15% rate they had predicted one week ago.

The increase in forecasts came after data last week that showed the index jumped 0.45% in September, up sharply from the 0.04% rate in August but in line with expectations. Analysts expect strong economic activity this year to increase prices for food and other consumer items in the coming months, fueling inflation.

Growth estimates in 2010 for Brazil’s economy, the largest in Latin America, were kept unchanged from the previous week at 7.55%, the central bank said.

For 2011, the IPCA estimates were raised to 4.99% from previous week’s 4.98%. The central bank has a 4.5% inflation target for 2010 and 2011, plus or minus 2 percentage points.

Currency War

The Brazilian government increased taxes on foreign investments in fixed-income securities for the second time in a month and Brazil’s Finance Minister Guido Mantega said countries trying to defend exports must end the “currency war.”

The so-called IOF tax on foreign inflows will climb to 6% from 4%, Mantega told reporters in São Paulo. The government will also close a loophole that allowed investors to avoid the tax on some margin deposits for transactions in futures markets.

The moves aim to curb foreigners’ appetite for short-term investments and curb the dollar inflows that have contributed to the Real 7.1% gain in the past three months, the biggest among major Latin American currencies.

Investors are putting money into developing countries such as Brazil amid near-zero interest rates in the US, Japan and the Euro region, which have fueled demand for higher-yielding assets.

The Real weakened 0.5% Monday to 1.6750 per US dollar, before Mantega’s announcement. The currency has gained 1.4% since October 4, when Mantega doubled the IOF tax on foreign investment in fixed-income securities to 4%.

The measures will go into effect once they’re published in the Diário Oficial, the country’s official gazette.

Countries from China to Japan are seeking to restrain their currencies to gain a trade advantage, roiling financial markets and prompting Mantega to last month warn of a worldwide “currency war.”

European Central Bank President Jean-Claude Trichet said Sunday that volatility in foreign-exchange markets is “counterproductive.”

“This currency war needs to be deactivated” Mantega insisted on Monday.

Mantega said other measures to stem the real appreciation could be taken, and existing programs may be expanded if needed. The higher taxes will only affect new flows of money into the country, not deposits already in Brazil.

Mercopress

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