Alexandre Tombini, the new head of Brazil’s hawkish central bank, kicked off his tenure by raising the key Selic rate a half point to 11.25pc, despite fears that this will push the over-valued real to extreme levels.
Poland also tightened, raising rates a quarter point to 3.75pc in a "pre-emptive" move to nip price pressures in the bud.
Brazil faces an acute dilemma since high rates have made it the darling of the global "carry trade", attracting US, European and Japanese funds chasing yield.
The inflows have turned the real into Latin America’s "Swiss franc", driving it up 39pc against the dollar and almost as much against China’s semi-fixed yuan over the past two years.
Rising rates make it almost impossible to stop the tsunami of capital, though the authorities are defending a line in the sand at 1.67 to the dollar for now by direct purchases of US assets.
"They are really worried about the level of the currency, but real interest rates of 5pc act as a magnet for inflows," said David Rees from Capital Economics. Brasilia has imposed taxes on hot money, with mixed results
Finance minister Guido Mantega has called it a "currency war that is turning into a trade war", claiming that Brazil is the victim of manipulation by both China and the US - the latter through quantitative easing.
Brazil’s trade deficit doubled last year to $71bn, and there is evidence that the strong real is letting Asian exporters eat into Brazil’s industrial base. The government has already adopted 28 anti-dumping measures against China, covering steel, tyres, synthetic fibres, chemicals, shoes and toys. China’s annual exports to Brazil have jumped from $5bn to $26bn in five years.
Brazil is mulling recourse to the World Trade Organization over predatory exchange practices, though the body does not police currency rates. President Dilma Rousseff - a former urban guerrilla fighter - appears more willing to confront China than her predeccesor "Lula", who overlooked industrial rivalry in order to champion a political alliance of the BRICs (Brazil, Russia, India, China) to confront America.
Critics say Brazil’s government bears much of the blame for imbalances because it prime-pumped the economy at the peak of the boom to win re-election, raising state spending by 11pc last year. Inflation jumped to 5.9pc in December.
Marcelo Ribeiro from the Pentagono Asset Management said Brazil is repeating its age-old pattern of boom and bust. "Brazil is wrongly perceived as the world’s best investment play. Fiscal policy is ultra-loose and sooner or later the fiscal vigilantes will force dramatic changes," he said.
