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.



  • Show Comments (4)

  • João da Silva

    [quote]Brazilian society has been taken for a ride just once more…by their world reknown champions in country and currency management !!!!!!![/quote]

    We have lots of differences, but I must agree with you. We are being taken for a sucker ride. Probably we have to wait until 2010 (20th anniversary ) for our bank accounts to be confiscated 😥

  • ch.c.

    “the Real, Too Strong for Its Own Good ” ?????
    – In 1995 the BRL rate was 1 to 1 against the US$
    – In 2002/3 if fell by 75 % to 1 BRL per US$0,27
    – Today it doubled from the 2002/3 low, give or take a little. (from around 0,28 to 0,59 US$ per 1 BRL)
    – Thus still 40 % below your pegged date
    – But to go back to the then pegged rate, your currency must still appreciate by nearly 70 % !!!! Yes nearly another 70 % is needed to go from US$ 0,59 per BRL for 1 BRL being the equivalent of 1 US$.
    But Brazilians always tired to keep a strong currency for more than a few years, today already feel their currerncy is….OVERVALUED
    – But looking at any 10 years rate of change, your currency is INEXORABLY weaker than the 10th previous year.And this measure is kind and nice to you since it measures against another SECULAR WEAK currency : the US$ !!!!!!!
    Lets face it, your currency doubled after it fell 75 %….FIRST !!!!!
    Not strong on a secular basis by any means…in my view.
    And looking from a low to a high (2003-2008) certainlky doesnt show the SECULAR TREND of
    a currency or a goods.
    Brazil is proving once more that their currency is in a SECULAR downtrend, and that any 2 to 5 years rally is only a BEAR market rally, but in no way a change in SECULAR TREND.
    Also true that Brazilians CANNOT see further out than 5 to 7 years. They better dont.
    And the Brazilian governments would make sure you dont.

    On a lighter and smiling note, in 1996 I went to SP – Rio -Bahia – Maceio etc etc. From the peg rate date your currency appreciated by 10 % against the US$. Your population was so sure that there was only one way for your currency but to continue to go up, your prostitutes and many shops REFUSED to be paid in US$, German marks or Swiss Francs.
    They wanted only their own local currency and ….nothing else !
    2 years later we all know what happened !!!! Smile
    Brazilian society has been taken for a ride just once more…by their world reknown champions in country and currency management !!!!!!!

    Applaude…..applaude….applaude !!!!! THEM…..not me !
    😀 😉

  • Peter Pan

    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.
    Check your figures, or are you rounding to the nearest .50 cents??

  • Jacyra

    vamo pisar na bola galera
    quem tem troco? 😉

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