Brazilian Currency, the Real, Too Strong for Its Own Good

Brazilian currency, the real The Brazilian central bank must keep the benchmark interest rate unchanged for the time being and avert increases that would further strengthen Brazil's currency, the real and derail an economic expansion, said two economic advisers of Brazilian President Luiz Inácio Lula da Silva, according to reports in the São Paulo financial press.

"Raising interest rates would be foolish," former Finance Minister Antonio Delfim Netto said in an interview in São Paulo on Wednesday. "Raising borrowing costs at this point would be sort of a suicidal move. Such a move would put the country in a trap."

The real has more than doubled against the dollar since Lula took office in January 2003, the best performance of the world's 16 most traded currencies. The surge will help turn Brazil's 2007 current account surplus of 1.46 billion into a 12 billion US dollar deficit this year, the central bank predicts.

Central bank policy makers said at their meeting last month that they considered raising interest rates on concern that inflation might overshoot an annual target of 4.5% due to surging domestic demand. They held the rate unchanged at a record-low 11.25%.

Higher borrowing costs and the stronger real would make Brazilian manufactured goods relatively more expensive at a time when global growth is slowing and the US, the region's biggest customer, is on brink of a recession, said Delfim, who met with Lula last month to explain his views.

The immediate impact of a rise in borrowing costs, apart from discouraging consumer and business feeling in the economy, would be lifting the cost of debt servicing for the government, he said.

From Campinas, Luiz Gonzaga Belluzzo, a former economic policy secretary for the Finance Ministry said that "we cannot have a short-sighted monetary policy that disregards its effect on the currency; I hope policy makers abstain from a rate increase which could fuel a crisis in our external sector."

Brazil's real interest rate, or the difference between the 11.25% benchmark lending rate and the 4.61% annual inflation rate remains the highest in the Latin America, bolstering the inflow of foreign capital and fueling the currency rally.

The government needs to slow federal spending to rein in demand and help control inflation, instead of raising rates and fueling a currency rally, both Belluzzo and Delfim coincided in the two interviews.

Delfim told Lula and other government officials that the country must speed up the implementation of measures aimed at spurring exports of manufactured goods, and cutting reliance on shipments of commodities overseas.

Brazil is preparing tax cuts and incentives to help 25 industries spark exports, Trade and Industry Minister Miguel Jorge said last month.

Belluzzo and Delfim Netto are members of an informal group of economic advisers that also includes Finance Minister Guido Mantega and Central Bank president Henrique Meirelles.

Mercopress

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