Brazil Exchange Rate


Brazil: Brazil announces new measures to curb the appreciation of the real

October 19, 2010

On 18 October, Brazilian Finance Minister Guido Mantega announced another round of measures aimed at curbing the excessive appreciation of the Brazilian real. Only a few weeks after raising the tax rate on foreign purchases of securities (IOF, Imposto sobre Operac?es Financeiras) from 2% to 4%, the government decided to increase the same tax to 6%. Moreover, the government also lifted the IOF rate on foreign investors' margin deposits for derivatives' operations from 0.38% to 6%. The new IOF rate of 6% is imposed only on fixed income capital inflows, with the IOF rate on equity and foreign direct investments remaining at 2%. After trading between 1.70 and 1.90 per USD from September 2009 to September 2010, the real continued to appreciate even after the IOF rate was raised to 4%, prompting the government to take additional measures. However, inflows towards assets affected by the new IOF rate represent less than half of total portfolio investments, limiting the effect of such tax increases on the exchange rate. Moreover, the appreciation trend is also driven by other factors, such as the general weakness of the U.S. dollar in currency markets and favourable terms of trade, which are boosting capital inflows into the country. As a result, the real quickly resumed the appreciation trend seen since September and traded at 1.68 per USD on 5 November. Against this backdrop, Consensus Forecast panellists cut their forecasts for the second consecutive month and expect the Brazilian real to end 2010 at 1.73 per USD, which is down 0.4 percentage points from last month's estimate. In 2011, the panel sees the real closing the year at 1.79 per USD, which is down 0.5 percentage points from last month's projection.

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