Brazil Further Unwinds Capital Controls After Real Weakens

Brazil reduced capital controls for the third time this month in a bid to temper the biggest decline among major currencies.

Policy makers starting July 1 will eliminate reserve requirements on short dollar positions held by local banks, the central bank said in a statement yesterday. The new rule comes after the government earlier this month removed taxes on currency derivatives and foreign purchases of bonds.

Brazil is unwinding capital controls that it began putting in place in 2010 to defend itself from policies Finance Minister Guido Mantega then characterized as a “currency war” that were hurting domestic manufacturers. Speculation the U.S. Federal Reserve will dial back its bond-buying program coupled with slow growth and quickening inflation in Brazil led the real to drop more than all 16 most-traded currencies tracked by Bloomberg in the past month. The weaker real threatens to fan inflation by raising the costs of imports.

“It may have some short-term impact but it won’t prevent the overall trend,” Pedro Tuesta, senior Latin America economist at 4cast Ltd, said in a phone interview from Washington yesterday about scrapping the reserve requirements. “Eliminating the measure doesn’t mean traders will abandon their long dollar positions.”

The real weakened 7.3 percent against the U.S. dollar in the past month and rose 0.6 percent yesterday to 2.2139.

Inflation

Annual inflation accelerated to 6.67 percent through mid-June, the fastest pace since November 2011. It has remained above the central bank’s 2.5 percent to 6.5 percent target range in two of the past three months.

To tame inflation, policy makers responded by raising the benchmark interest rate, after keeping borrowing costs at a record-low 7.25 percent from October to March. The board lifted borrowing costs by a total of 75 basis points in its past two meeting.

The world’s second-biggest emerging market expanded 0.55 percent in the first three months of 2013, missing economists’ forecasts of a 0.9 percent increase.

To contact the reporter on this story: Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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