The currency vs. inflation conundrum in Brazil


Shutterstock photo

Nobody knows what is going on with the currency in Brazil. After months of targeting a weaker real, the Brazil Central Bank may be changing course, and they may have to.

Image courtesy Artyom Sharbatyan: All of this is leaving investors with a little Brazil whiplash, as this market remains the biggest disappointment in emerging market equity land after two years of underperformance.

Today's local newspapers are saying the Brazil Central Bank (BCB) will use real appreciation to tame inflation; yet if you listen to President Dilma Rousseff yesterday she said "...we have macro conditions to still reducing interest rates".

Well what is it -- are you lowering rates and putting more downward pressure on the currency, or are you letting the currency appreciate in order to stem inflationary pressures that are building?

Maybe its politics but the government keeps endorsing incentives for consumption and investments.

Meanwhile reducing the SELIC rate (Special Clearance and Escrow System) runs in the opposite direction of the BCB's interest in using the currency to fight inflation.

For now Rousseff looks to keep spending to stimulate, and there is political motivation to do so. Brazil's consumers will keep spending but be wary -- there may be slower consumption ahead. The consumer space has been the only safe place to invest in Brazil for two years, and this may be changing.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks

More from Emerging Money


Emerging Money

Emerging Money

Emerging Markets
Follow on:

Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by