September 1, 2011 / 2:46 PM / 8 years ago

Exclusive: "Mr Currency War" vows to fight QE3

BRASILIA (Reuters) - Brazil plans to fight back against any new round of quantitative easing in the United States by taking fresh measures to protect its currency and lobbying against the move in the G20 group of major economic powers, Finance Minister Guido Mantega told Reuters.

Brazil's Finance Minister Guido Mantega speaks during an announcement of new measures for the country's economy in Brasilia August 29, 2011. REUTERS/Ueslei Marcelino

Mantega said he believes a double-dip recession in the United States and Europe is unlikely but that the U.S. Federal Reserve will likely implement a new round of quantitative easing on monetary policy — known as QE3 — because policymakers there have no other tools to stimulate the economy at a time of growing global uncertainty.

“Unfortunately, it’s not going to have much (positive) effect on the United States. But it’s going to have a terrible effect on the rest of the world,” Mantega said.

In its previous two rounds of quantitative easing, the Fed created money to buy U.S. government bonds, meeting its aim of lowering long-term interest rates. That helped weaken the dollar and also drove capital flows to emerging market countries like Brazil which offered higher interest rates.

Mantega made his comments late on Wednesday, immediately prior to a surprise interest rate cut by Brazil’s central bank. He declined comment on the short-term interest rate outlook, and requested his comments not be published until Brazil’s financial markets opened on Thursday.

In a wide-ranging half-hour interview in his office in Brasilia, Mantega struck a very dovish tone on inflation, which is running above 7 percent annually. He said recent data showed inflation was already slowing to a pace consistent with the central bank’s target of 4.5 percent.

He also said the government could tighten spending by more than expected next year in an effort to allow interest rates to come down over time and that policymakers would need to be nimble because the economy, which is showing clear signs of slowing, would be in large part dictated by events abroad.

Mantega said the greater liquidity resulting from QE3 would likely cause global commodities prices to rise and push capital flows toward more “dynamic” economies such as Brazil.

Yet he vowed that Brazil will not allow its currency, which is already considered badly overvalued, to strengthen further.

“The currency war is going to get worse,” said Mantega, who achieved a degree of fame in financial circles last year when he coined the term to describe how countries are weakening their currencies to try to gain an upper hand in global trade and stimulate their economies.

“We’re going to take even stronger measures to keep (the real) from strengthening,” he said. “And we’re going to continue to try to persuade countries in the G20 that they should change their policies.”

Mantega said Brazil is ready to increase a tax on derivatives from its current level of 1 percent if markets “abuse” the real and they try to strengthen it beyond its recent level of about 1.60 per dollar.

Brazil has taken several steps to limit gains in its currency, which is one of the world’s most overvalued.

Measures passed in July permit the derivatives tax to be increased up to a level of 25 percent in order to make speculation on Brazil’s currency markets less profitable. They also allow the government to modify margin and deposit requirements, Mantega said.

“We haven’t used all our options,” he said. “We’ve got the ammunition, but we haven’t used it yet.”

SLOWING ECONOMY DEMANDS NEW STRATEGY

Mantega said Brazil’s economy is showing clear signs of a slowdown, and the government is taking steps on fiscal policy and elsewhere to prepare for a new phase of slower growth after the boom of recent years.

He said the government wasn’t ready to officially revise its 4 percent growth forecast for this year, but is “evaluating” the target. Many private-sector economists have cut their forecasts in recent weeks and now expect growth of around 3.8 percent in 2011.

Mantega said inflation was under control, and is likely to move in coming months at a pace consistent with the middle of the central bank’s target range of 4.5 percent, plus or minus two percentage points.

Annual inflation stood at 7.1 percent through mid-August — but is now falling, Mantega said.

“The truth is we don’t have 7 percent inflation,” Mantega said. “We had 7 percent inflation in the last 12 months. We had it. In the past.”

“But, in the present, what we have is inflation of 4.5 percent, because if you look into the future at the predicted inflation, starting in August, September, going through December, you have monthly inflation predicted at 0.3 percent or 0.4 percent a month. Just count that up.”

Mantega said the government could raise its primary budget surplus target for next year, which currently stands at 3 percent. “We’re going to fully reach that goal, and if possible we’re going to save even more,” he said.

He said the government was now making a broad shift in fiscal policy in order to allow Brazil’s interest rates to fall over time.

“The economy doesn’t need fiscal stimulus now. When it did need it, we acted. But if we have to give stimulus, it will be monetary instead of fiscal,” he said.

Editing by Kieran Murray and W Simon

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