Brazil pledges to impose capital controls to slow down currency rally

The government of Brazil is pledging to slow down the rally of its currency, the real, by imposing more capital controls in order to help export companies that have been hurt by gains in the currency.

“We can’t forget we are in a currency war,” said Finance Minister Guido Mantega. “We’re not going to allow our American friends to melt the dollar.”

In her inaugural speech on New Year’s Day, Brazil’s new president Dilma Rousseff stated that she will protect “the country from unfair competition and from the indiscriminate flow of speculative capital.”

The real has surged more than 35 percent against the dollar since early 2009, making it one of the strongest performing currencies among the major economies, and perhaps among the most over-valued.

Mantega, who created a controversy last September when he spoke of a global currency war, said there are infinite measures that we can take. One of them is to manage the entry of speculative capital in the short-term.

For example, last year the government raised the IOF tax on short-term capital inflows by threefold to 6 percent – a measure Mantega described as “effective.”

Moreover, to guarantee that Brazil’s trade surplus stays at the $20-billion level posted in 2010, Mantega noted that government will use tax and trade policies.

President Rousseff’s new government will also establish a program of significant spending cuts – measures that will enable the central bank to start lowering interest rates (currently at 10.75 percent), thereby gradually lowering the value of the real.

Mantega expects the Brazilian economy grow by about 5 percent this year and predicted the year would be characterized by a rebalancing between fiscal and monetary policy, and between the public and private sector.