Published by Minyanville

For the fifth time this year, Brazil has upped its benchmark Selic interest rate to 12.5%. Though expected, the rise underlines Brazil’s current inflation worries, hampered by the meteoric rise of the real. It was only just over a month ago in early June that the interest rate rose to 12.25%.

Inflation hit 6.75% in the year to mid-July while two weeks ago, the real was at a 12-year high of 1.5524 against the US dollar. The central bank’s monetary policy committee announced the hike in a noticeably short statement on Wednesday, which analysts described as less hawkish than previous announcements.

“What stood out is what is not there,” Alberto Ramos of Goldman Sachs told Reuters. “What is not there is the language that would suggest there would be a prolonged period of rate adjustments, I think implicitly they are not committing to make this a prolonged adjustment cycle.”

China, India and other emerging markets are similarly keen to avoid overheating, while developed economies offer interest rates of near-zero. The overheating of Brazil has been much debated in recent weeks.  On paper, the country’s economy appears strong with 7.5% growth last year and an expected figure of 4% in 2011. This comes alongside a commodities and consumption boom that has pushed many into the middle classes.




However, Brazil’s high inflation needs curbing. Expectations for 2012 are at 5.2%, according to Bloomberg, up from 4.5% at the start of this year. The central bank’s target is 4.5% for the year, with a 2% point tolerance.

The inflation is fed by falling unemployment and rising wages, notably in the construction sector as the country prepares for the World Cup in 2014, the Copa America in 2015 and the Olympics to top it off in 2016. Last month’s unemployment figure was 6.2%, down from 7% in the same period last year and from 6.4% in May.

Pushing interest rates up is one way of curbing inflation, reigning in lending and therefore spending. However, it's a tough line for President Dilma Rousseff to walk. The higher rate is likely to attract further foreign investment which will inflate the real even further, making export less competitive.

Imports—of primarily cheap Chinese goods—are up to a record $206 billion over the last year. This is troubling the manufacturing sector which is unable to compete.

It's commodities rather than manufactured products that Brazil is successful at exporting. Soy, iron ore and ethanol alone make up 80% of Brazil’s exports to China.

Rousseff visited the Asian giant earlier this year, hoping to promote manufactured products. She had some success with Embraer (EMJ); Brazil’s aircraft manufacturer has won orders worth $1.4 billion from Chinese airlines. However, other industries have been left waiting.

OIL
Recently-released statistics show that Latin America holds one-fifth of the world’s oil reserves. While up to 85% of that is in Venezuela, Brazil’s 5% no doubt will be attractive to oil companies, thanks to the government’s huge investment. State firm Petrobras—along with partners—is pumping $73 billion into the Santos basin over the next four years, for example.

Huge undersea discoveries have been made recently off Brazil’s Atlantic coast. The Tupí oil field discovered in 2007 holds around 33 billion barrels, while the Jupiter oilfield found a year later is thought to hold 12 billion. Brazil’s oil reserves are likely to last for another 18 years, according to the Latin American Energy Organization.

Petrobras is currently preparing to test a newly discovered well off Brazil’s northeastern coast at the Sergipe Basin, according to Francisco Nepomuceno Filho, the company’s London head of exploration and production. Brazil as a whole could have a potential of the same size of the North Sea, including Norway and the UK,” he told Bloomberg. “Those two countries grew a lot and had huge development.”

Nepomuceno was sure that the country would reach its 2.3m barrels-per-day average this year.

NUCLEAR SUBMARINE FEARS FOR BRITAIN
Brazil has begun a project which hopes to manufacture Latin America’s first nuclear submarine. Four diesel-powered vessels are to be built to kick the project off. Each will cost $565 million, with delivery of the first expected in 2016.

The news has led Michael Moran of GlobalPost to muse that the Britain may need to pay close attention, as Brazil has been vocal in its support of Argentina's claim to the Falkland Islands, or Las Malvinas.

A scenario of war between Argentina and Britain backed by Brazil may seem far-fetched, however, there is certainly a power shift in the region in Latin America’s favor.