Brazil Dollar Inflows Rise Sixfold on Higher Interest Rates

Brazil received nearly six times more currency flows in the first 13 days of May than it did in the whole of April, as investors seek to profit from higher interest rates.

Inflows rose to $8.8 billion in May 1-13 period, from $1.5 billion for all of April, according to the central bank. Policy makers increased borrowing costs by 125 basis points, or 1.25 percentage point in 2011, in a bid to contain inflation currently running above the government’s target for the first time since 2005.

“You can’t swim against current -- while you have this level of interest rates, capital will continue to be attracted,” Francisco Carvalho, head of currency trading at Liquidez DTVM Ltda, said in a telephone interview from Sao Paulo today. “The interest rate differential remains so big that it’s still better to bring money to Brazil, even with interest rate increases in other economies.”

Brazilian Finance Minister Guido Mantega last year accused rich nations of provoking a “global currency war” by keeping interest rates at near-zero levels. The real last month strengthened to a 32-month high and is up 44 percent against the U.S. dollar since 2008, the best performance among seven Latin American currencies tracked by Bloomberg. The currency erased losses to rise 0.2 percent at 1:06 p.m. New York time to 1.6119 per dollar after today’s inflow report was released, according to Bloomberg data.

‘Tough Measures’

Brazilian President Dilma Rousseff’s administration on March 29 increased to 6 percent a tax on new corporate loans and debt sales abroad by banks. A few days later, Rousseff applied the higher tax to renewed, renegotiated, or transferred loans of up to two years in length.

Companies previously paid a 5.38 percent tax on loans up to 90 days and zero tax when the operation exceeded three months. In October, Mantega tripled to 6 percent a tax on foreign investors’ fixed-income purchases.

Mantega, in an interview yesterday with Globo News television, said dollar inflows into the country have returned to a “reasonable” level, after the government took steps to stem a flood of foreign money.

“In March, we had a torrent of dollars,” Mantega said in an interview yesterday with Globo News television. “We took tough measures, the IOF tax, and we succeeded in stemming the flow. In May it returned to a reasonable level.”

‘Water on the Fire’

Brazilian inflation is being stoked by the country’s tight labor market, and the service sector, Mantega said. Emerging markets with heated economies, such as Brazil, India and China, risk inflation from commodity price inflation spreading to other areas, Mantega said.

Annual consumer price inflation breached the upper limit of its target range in April, accelerating to 6.51 percent, the fastest pace since 2005.

Central bank President Alexandre Tombini raised the benchmark Selic by 25 basis points to 12 percent on April 20 after 50 basis-point increases in January and March. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

Brazil is trying to cool the economy, without slowing growth too much, Mantega said.

“We want to throw water on the fire, without putting it out,” Mantega said. “We want the economy to keep growing.”

Job Growth

Brazil added 272,225 registered jobs in April, the second-fastest pace in almost a year, the Labor Ministry reported yesterday.

Brazil’s unemployment rate reached a record low of 5.7 percent in December before rising to 6.5 percent in March, the lowest ever for that month. The economy is near full employment, Rousseff said last month.

The country’s high interest rate is necessary for the time being, Mantega said.

Brazil will seek to cut to payroll taxes that firms pay, to help businesses remain competitive, Mantega said. The government also wishes to cut the state sales taxes, Mantega added. The Finance Ministry will propose the cuts by June, he said.

The yield on the interest rate futures contract maturing in October 2011, the most traded in Sao Paulo today, rose three basis points, or 0.03 percentage point, to 12.22 percent at 1:16 p.m. New York time.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE