Thursday, December 1, 2011

Hot and Cold in Brazil

"When Brazil overheated by fractions,
We carried out rate-hiking actions;
When it cooled a bit, then
We sank 'em again,
Plus the tax on financial transactions."

Brazil has surprised the markets with a fiscal stimulus package meant to block the "contagion" of developed countries' financial distress, according to Finance Minister Guido Mantega. Such measures include the lowering of financial transaction taxes on consumer loans, home appliances, homebuilding and foreign purchases of corporate bonds tied to infrastructure projects. All this comes on the heels of the Banco Central's lowering the overnight lending rate to 11% (although the highest among the major economies, this is low for inflation-prone Brazil). What's odd is that, not long ago, the central bank and finance ministry had raised rates and let tax breaks expire, because they feared an overheating economy; though cheered in the short run, some market participants wondered aloud about Brazil's long-run policy consistency.

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