September 21, 2012

LONDON -- Brazil threatened on Friday a further clampdown on speculative foreign capital, firing a warning shot in a "currency war" its finance minister blamed on money-printing by Western central banks.

Finance Minister Guido Mantega said Brazil would not allow its real currency to strengthen too much and was prepared to take all steps to prevent this, including "those we adopted in the past".

"If necessary... we have (the option) of short-term capital taxes," he told reporters on the sidelines of an Economist conference in London.

The government has introduced a number of measures since 2009 intended to curb excess inflows of foreign investors' dollars but has recently reduced their scope.

Brazil shocked investors in October of that year by taxing some categories of foreign capital flowing into stocks and bonds. It said at the time that some of the flows constituted hot money and were harming the economy.

Mantega has become one of the fiercest critics of the asset buying programmes that Western central banks have been using to shore up their economies, accusing them of in effect devaluing their currencies to boost competitiveness.

Some of the extra funds generated by quantitative easing (QE) have in the past found its way into emerging markets, lured by higher interest rates and yields, driving gains in currencies including the real and Indonesia's rupiah.

Mantega said the U.S. Federal Reserve's decision this month to embark on a third round of bond-buying, followed by a similar move by Japan, would revive global "currency wars" by forcing other countries to act to protect their own economies.

"(The United States and Japan) will be stimulating the currency wars as (they) will lead all countries also to pursue these wars," Mantega said. "It's natural other countries will defend themselves."


The central bank has also intervened heavily in currency markets to hold the real near the 2-per-dollar level via billions of dollars in reverse swaps. It has also cut interest rates to a record low of 7.5 percent.

Mantega told the conference there would be no let-up in this process.

"The central bank will buy more reserves, we already have a very high level of reserves and we will purchase more if there is a strong offer of dollars in the Brazilian economy," he said.

"We will do more reverse-swapping...we won't allow our economy to become uncompetitive."

The Brazilian economy - the world's sixth largest according to International Monetary Fund data - has virtually flatlined since expanding 7.5 percent in 2010.

Economists expect the economy to grow 1.5 percent this year, despite a series of rate cuts and tax breaks, and below the government's 2 percent forecast.

Mantega predicted growth would pick up again to around 4-4.5 percent on an annualized basis in 2013 in response to the lowered borrowing costs and stimulus measures the government has put in place.

Analysts are split over whether the central bank will hold or cut rates next time it meets on Oct. 10, with the latest data showing a rise in inflation on higher food prices.

Mantega said the central bank had room for further rate cuts.

By Ana Nicolaci da Costa and Sujata Rao


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