beyondbrics

Brazil’s finance minister kept investors guessing this week by warning that more capital controls could be on the way to curb the recent sharp appreciation in the country’s currency, the real, against the dollar.

But Guido Mantega had hardly finished declaring that he was standing by the “currency war” he declared last year than his boss, President Dilma Rousseff, appeared to quell the idea of more measures to control the exchange rate.

Valor Economico on Thursday quoted an aide of Ms Rousseff as saying the presidential palace was aware that Mr Mantega was planning measures.

But it said the president had not authorized any yet and was aware that Brazil would be unlikely to be able to engineer a reversal in the country’s exchange rate. In fact, the president seems to be more worried about inflation than the exchange rate and is happy to allow some appreciation if this will reduce prices, Valor’s source said.

Perhaps the president was already aware of figures that were released on Thursday by the national statistics agency showing that Brazil inflation in June exceeded for the third month the upper limit of the central bank’s target range for annual inflation of 6.5 per cent.

Inflation came in at 6.71 per cent during the month, exceeding the forecasts of most economists surveyed by Bloomberg. The month-on-month rate of increase in the IPCA index, the benchmark for measuring inflation, was lower but economists had expected a sharper decline.

This from Paulo Leme, of Goldman Sachs:

The drop in IPCA inflation in June was smaller than one year ago, the main reason being that wages and services continued to rise. This is because labor markets remain tight and unlike tradeables, whose demand can be met by imports, the excess demand for non-traded goods raises inflation.

The real has strengthened 8.2 per cent against the dollar since January 7, worrying Brazilian exporters, which fear they are losing competitiveness. Domestic industry is concerned that they too can no longer hold their own against imports.

But for now, President Rousseff probably fears voters more than industrialists. She knows that capping inflation is the first order for maintaining economic stability and avoiding limiting further increases in interest rates. The industrialists will have to grit their teeth and hold on.

So too will Mr Mantega, Brazil’s impatient currency warrior who looks in danger of turning vigilante.

Related reading:
Guido Mantega: It’s war (again), beyondbrics
Guido Mantega’s spoiled weekend, beyondbrics
Currency rise leaves Brazil in bind, FT
In depth: Currency wars, FT