Brazil is one of the so-called BRIC countries, an economy which is classed as emerging and growing strongly. The country has huge potential but it also has one of the most unequal distributions of income in the world. Some of its major cities have pockets of abject poverty sitting amongst the rising tower blocks and new infrastructure which is being constructed. With a growing economy, however, comes other problems including inflation.

For some time now the Brazilian government has been complaining about other countries influencing exchange rates to keep them low to help boost export-led growth. The Brazilian currency, the real, has been rising in recent months caused in part by flows of capital into the country. This appreciation of the exchange rate has put pressure on exports. Over the past month the Brazilian central bank has intervened on the foreign exchange markets to try to stabilise the value of the real against the dollar and as a result the value of the currency has been more stable at around R1.66 against the dollar.

It might now be harder for the central bank to maintain that rate after it raised its base rate, the Selic, by half a per cent on Wednesday to 11.75 per cent. The move is the second half a point increase this year and is intended to try and combat inflation which is currently running at around 5.9 per cent.  Part of the reason for the relatively high interest rate is that the economy is overheating - aggregate demand is growing faster than aggregate supply. Gross domestic product (GDP) in 2010 grew by over 7 per cent and is forecast to grow by around 5 per cent in 2011. The government has tried to implement some public spending cuts but analysts believe more is needed to help improve sustainable growth (economic growth which is in line with a stable and low rate of inflation).

The problem facing Brazil now is that the higher interest rates may mean that even more money is sucked into its economy from overseas, as investors seek out higher returns which low interest rates in many developed economies are not providing at the moment. This will put even more pressure on the exchange rate and if it appreciates further will make it even harder for exporters to cope.