Mantega needs to move war to home soil

Guido Mantega, Brazil’s bellicose minister of finance, likes fighting talk. The man that sparked the currency wars headlines in 2011 is at it again. This time he is using loaded words such as Brazil having an “arsenal of measures” at its disposal when talking about his ability and willingness to deploy new capital controls.

It’s easy to understand why. Sitting in Brasilia – looking at Brazil’s slowing growth and rising currency – he takes aim at the obvious target for his frustration: the unprecedented monetary looseness of the US, which is creating Mantega’s large capital inflows.

Why wouldn’t he want to stem the flow and halt the rise of the real? The central bank has accumulated a $360 billion foreign-currency reserve and buying more dollars would add to this hugely expensive policy.

In this situation, even the IMF is backing the use of macro-prudential measures in the “short term”. The problem is that Mantega’s enemy isn’t short term. The low-rate environment in the US is likely to persist into 2014 and there might be even more quantitative easing.

So Mantega is also responding with his own monetary loosening – fighting low US interest rates with lower domestic interest rates to lessen Brazil’s attractiveness to yield-hungry investors in developed markets. This is dangerous.

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