Brazil slams brakes to curb inflation, risking hot money tsunami
Brazil has raised interest rates sharply, following China, India and host of countries across the emerging world in acting to curb inflation and counter the flood of dollar liquidity from the US.
By Ambrose Evans-Pritchard
19 Jan 2011
Alexandre Tombini, the new head of Brazil’s hawkish central bank, kicked off his tenure by raising the key Selic rate a half point to 11.25pc, despite fears that this will push the over-valued real to extreme levels.
Poland also tightened, raising rates a quarter point to 3.75pc in a “pre-emptive” move to nip price pressures in the bud.
Brazil faces an acute dilemma since high rates have made it the darling of the global “carry trade”, attracting US, European and Japanese funds chasing yield.
The inflows have turned the real into Latin America’s “Swiss franc”, driving it up 39pc against the dollar and almost as much against China’s semi-fixed yuan over the past two years.
Rising rates make it almost impossible to stop the tsunami of capital, though the authorities are defending a line in the sand at 1.67 to the dollar for now by direct purchases of US assets.