Published by Minyanville

Brazil’s already high interest rate was raised to the psychological benchmark of 12% this week, in an attempt to keep inflation down. While one of the world’s highest rates, the move is in fact smaller than many investors had hoped, and smaller than the two previous rises of 0.5% earlier this year which took the rate to 11.75%.

Inflation hit 6.13% for the 12 months to mid-March, massively overshooting central bank targets of 4.5%. While high interest rates attract foreign investment, they also push up the value of the local currency, the real, against the US dollar and therefore make manufacturing and exporting less competitive.

“Fast rising inflation, pushed in part by soaring global food and fuel prices, has put Brazil's new central bank President Alexandre Tombini in the difficult predicament of seeking to balance the country's need to fight price rises with a desire to avoid hampering Brazil's extraordinary growth story by pushing rates even higher,” says John Lyons in the Wall Street Journal.

Many economists are predicting the interest rate to hit 12.5% by the end of 2011.

While cautiously balancing inflationary pressures, the government will breathe a sigh of relief as tax revenue surged in March to 9.7%, up from the same period in 2010. Tax revenue for the month totaled $44.9 billion thanks to a rise in consumer spending.

Unemployment Lower than Expected

News that Brazil’s unemployment rate rose less than expected in March—6.5% from 6.4% in February—caused the country’ IBOVESPA index to rise 1.1% to 66,158 points at the close of trade on Tuesday, its highest figure in a month. The rise was, however, skewed by the downward tumble earlier this week thanks to Standard & Poor’s “negative” outlook on its AAA credit rating for Brazil’s second-largest trading partner, the United States.

State oil company Petrobras rose 0.9% on Tuesday, while iron-ore producer Vale (VALE) gained 1.2%. Embraer (ERJ) was one of the few companies to fall, down 0.5%.

News of the lower-than-expected rise in unemployment is not exactly positive, however. Brazil created 92,675 net payroll jobs in March—a third of the figure for February. This year has seen 583,886 jobs created. This tight labor market is fueling fears of higher inflation, with employers paying higher wages, especially for skilled workers. This leads to more spending which is likely to push inflation up.



China Pledges Deals

President Dilma Rousseff’s visit to China last week appears to be paying off, with the Asian giant showering Brazil with business deals. When Barack Obama, who visited Brazil just a few weeks ago—apparently in order to combat growing Chinese hegemony in the region—he failed to make many concrete deals. China, on the other hand, has sent Rousseff back with billions of dollars worth of investments, already pledged.

Companies involved include Taiwanese electronics manufacturer Foxconn (FXCNF) as well as orders for Brazilian jets manufacturer by Embraer from China.

Private Equity Picks Up

Brazil has now overtaken China as the number one destination for private equity investment. The Latin American giant is seen as having little political risk compared to China, as well as strong economic growth leading to a larger and larger middle class.

JPMorgan (JPM) is looking to double the number of people it employs in Brazil. It plans to employ up to 1,200 personnel there according to the company’s chief executive in Brazil, Claudio Berquo. The company also acquired Rio-based hedge fund Gavea in 2010.

US Criticized

Brazilian finance minister Guido Mantega stoked the lukewarm fire between the United States and his own country saying that wealthy nations, such as the United States, were seeking to solve their own economic problems at the expense of the developing world. He accused them of attempting to “export their way out of difficult economic situations,” causing particular pain for the world’s poorest people, he added.

World Cup Preparations Behind Schedule

Ten of 13 airport terminals in Brazil, set to be upgraded for the 2014 World Cup, may not be ready in time, according to a government-backed report. Even if the airports were ready in time, 14 of Brazil’s 20 airports would be operating above capacity. The country is expecting up to 1 million visitors during the summer tournament in 2014, as well as many more for the following year’s Copa America, and the Olympics in 2016.