Brazil & Southern Cone - May 2006 (ISSN 1741-4431)

The US dollar and the Brazilian risk premium shot up in the week beginning 22 May following the markets' jumpiness about the direction of US inflation and interest rates. The finance minister, Guido Mantega, was relieved at the markets' change of direction: he had been promising that the government would take action to reverse the rise in the Real against the dollar.

Mantega had announced, before the crash on 22 May, after a tense meeting with the country's main industrial lobbying group, the Federação das Indústrias do Estado de São Paulo, that he was working on a package on measures to help exporters by lowering the Real against the dollar. The strength of the Real had been causing difficulties for agribusinesses, the shoe industry and, crucially, the motor industry. Mantega stressed that Brazil "is well-equipped to face global turbulences". He pointed out that most of the investment in the country is non-speculative and that the prospects for capital flight from Brazil will be marginal. Mantega argues that the current international volatility will give renewed impetus to the export sector which has been driving growth for the past two years. Indeed, because of the strong Real, imports have been growing at a staggering rate while exports have lost steam. In the third week of May, for example, imports were 43% higher than in the second week while exports rose only 4.09%.

What is clear is that the central bank's monetary policy committee still has plenty of scope to cut interest rates further. In April inflation was 0.2%, half the rate in March (0.4%) and was the lowest rate for nine months. In the first four months inflation has been 1.65% and the 12 month rate was 4.6%, pretty close to the government's target of 4.5% inflation for 2006. In 2005, the inflation rate was 5.7% and the target was 5.1%. This year the harvest has produced an increase in the availability of ethanol, distilled from sugar. Earlier in the year, shortages of ethanol had driven up fuel prices. Ethanol is added to petrol in Brazil, helping to keep blunt the effect of the surge in international oil prices. In April, the price of a litre of ethanol fell: in March ethanol prices had risen 13%.