Brazil sees capital flows as threat to stability

By @ibtimes on

Brazil's central bank defended efforts to erect barriers to foreign money, arguing a deluge of capital was pressuring inflation and threatening the stability of financial markets.

We are facing now a great flood of international liquidity, Deputy Central Bank Governor Luiz Pereira da Silva told a bankers' forum in Canada on Sunday. Too much of a good thing can be a problem.

As the world economy recovers from recession, Brazil and other countries have put up new barriers to an influx of foreign capital that has hurt exporters by strengthening exchange rates. This has been criticized by some economists and policymakers.

Bank of Canada Governor Mark Carney, while also acknowledging capital controls could work at times, he said on Saturday they run the risk of distorting markets.

IMF Managing Director Strauss-Kahn said that in some cases, capital controls might be useful.

Pereira said the money being pumped into Brazil was accelerating inflation that has already risen in part because a global commodity boom has boosted food prices.

The current unusual liquidity conditions are affecting credit markets in emerging markets. Central banks must pay attention to these effects because they threaten financial stability, he said.

Pereira said inflation in Brazil is expected to rise temporarily in the next few months although he expects it will return to the levels consistent with its target following what he referred to as a bump.

(Reporting by Jason Lange and Louise Egan, editing by Maureen Bavdek)

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