The Brazilian real is well-placed to resist the latest round of U.S. monetary stimulus due to “lines of defense” erected by the government, Finance Minister Guido Mantega said.
The currency won’t strengthen as much in response to the U.S. Federal Reserve’s third round of quantitative easing, or QE3, as it did during the first two rounds, due to a tax on financial transactions known as the IOF, and the country’s record-low interest rates, Mantega said.
“Gradually, there will be an entry of dollars,” Mantega said in an interview in Tokyo, where he is attending a meeting of the International Monetary Fund. “I don’t think that a lot will enter, because the Brazilian economy is protected, defended, with measures such as the IOF.”
The real has declined 0.9 percent since QE3 was announced on Sept. 13, and has weakened 22 percent since the central bank began cutting rates in August 2011, the biggest fall of 16 major currencies tracked by Bloomberg. Analysts are split almost evenly on whether central bank President Alexandre Tombini will today cut the benchmark Selic rate for a 10th straight meeting, to 7.25 percent, or leave it unchanged.
Brazil would prefer to see the U.S. stimulate its economy through increased fiscal spending rather than monetary easing, Mantega said.
“The policy has two legs,” he said. “The monetary leg is very long, and the fiscal leg is short, so they move with a limp.”
Brazil has reduced its benchmark rate by five percentage points since August 2011, to a record low 7.5 percent, to try to revive the slowest growth among the major emerging markets that make up the so-called BRIC nations. President Dilma Rousseff’s government has also imposed barriers on capital inflows and purchased dollars in the spot and futures markets to weaken the real and help the country’s manufacturers.
The government remains concerned by its trade deficit with the U.S., which was traditionally a surplus, Mantega said. Brazil will prevent an appreciation of the real even if inflation picks up, Mantega said.
“The government doesn’t use the exchange rate to control inflation,” Mantega said. “I don’t see a tendency for price increases in the Brazilian economy, but if there were one the central bank would take the necessary steps.”
The weak global economy will exert a deflationary impact on Brazil next year, while government tax cuts also help curb price increases, Mantega said.
Annual inflation in Brazil accelerated in September for a third straight month. Prices as measured by the IPCA price index rose 5.28 percent from a year earlier, the fastest pace since February.
Inflation has remained above the mid-point of the central bank’s target for the last two years, and analysts in the latest central bank survey forecast that it will end 2013 at 5.44 percent. Brazil targets inflation of 4.5 percent plus or minus two percentage points.
The economy will expand about 2 percent this year, and by 4 percent to 4.5 percent in 2013, Mantega said. It can grow half a point faster than that without generating inflation, he added. The economy’s year-on-year growth in the second quarter was 0.49 percent, slower than that of Russia, India and China, the other BRIC countries.
The government has complemented Tombini’s rate cuts with a series of stimulus measures, such as increasing subsidized lending by national development bank BNDES, reducing bank reserve requirements, and pressuring commercial banks to cut rates on consumer loans.
Mantega said the spread on consumer loans will continue to fall because of competition as state-controlled banks cut their rates.
“The reduction of the spreads, and the rates charged by banks, which are very high, is as important as the reduction in the Selic,” Mantega said. “This spread needs to fall. It has already fallen, but it could fall more to stimulate the economy more.”
The average interest rate on consumer loans was 35.6 percent in August, the lowest since 1994, the central bank said Sept. 26.
Investors’ inflation projections have risen 43 basis points, or 0.43 percentage point, to 5.68 percent since the start of September, based on the yield gap between inflation-linked notes due in 2015 and similar-maturity fixed-rate bonds, a gauge known as the break-even rate.
Brazil’s Bovespa index has fallen 5.8 percent in dollar terms this year, the worst performance among major stock markets in the Americas after Argentina’s Merval Index.
Thirty-eight analysts surveyed by Bloomberg forecast the central bank will hold rates today, while 35 predict a quarter-point cut.
As policy makers gather in Tokyo for the IMF meetings, central bankers from Japan and Switzerland expressed concern about the value of their currencies, and the Fed again drew fire from emerging markets for propelling their currencies higher, prompting a riposte from Fed Vice Chairman Janet Yellen.
Asked about such worries, Yellen said in Tokyo that if the Fed succeeded in rallying the U.S. economy, then the whole world would win. Yellen said the Fed is not the main factor and governments have tools of their own to protect their economies.
“It’s not the intention of the U.S. and Fed to make this more difficult,” Yellen said. “On balance, stronger U.S. growth is beneficial for the entire global economy.”