A Brazilian Senate committee recommended confirmation of Alexandre Tombini as the country’s next central bank president after he pledged to fight inflation and act to prevent the formation of credit bubbles.
Tombini, at his confirmation hearing, told lawmakers that the increase in capital and reserve requirements announced by the central bank Dec. 3 would have an impact on demand, and slow the expansion of credit to a “safe” pace.
“We recognize they will have an impact on the economy, on aggregate demand, and consequently affect the conditions in which monetary policy is processed and defined,” Tombini said. “They are not substitute mechanisms, they are different.”
The yield on Brazil’s overnight interest-rate future contract due January 2012 fell as much as four basis points to 12 percent, as some investors took Tombini’s remarks to indicate a preference for tighter banking regulations and fiscal policy over increases in the interest rate, said Zeina Latif, a senior economist with RBS Securities Inc. in Sao Paulo.
“Markets are reacting to this perception that other non- conventional instruments will be used,” said Latif. “The Selic would not rise significantly, because the preferred instrument is macro-prudential measures and fiscal policy.”
The increase in reserve requirements for time deposits and non-interest bearing accounts damped speculation that the central bank would raise the benchmark rate tomorrow to bring inflation down from the highest since April 2009. Rate-futures yields due in January show traders expect policy makers to keep the Selic unchanged tomorrow at 10.75 percent. A day before the Dec. 3 announcement, they were betting on an increase of at least 25 basis points.
University of Illinois
Rousseff pledged “total operational autonomy” for the central bank after she nominated Tombini to head the institution. Policy makers are appointed and removed by the country’s president and aren’t limited by set terms.
The 46-year-old economist, who has worked over a decade at the central bank and currently sits on the bank’s eight-member board, earned his doctorate at the University of Illinois at Urbana-Champaign.
At his confirmation hearing today, Tombini said that Brazil needs to create the conditions so its inflation target, currently at 4.5 percent a year, can fall to levels seen in other major emerging markets. The country’s real interest rates, the highest in the Group of 20 nations, should continue on their long-term, downward trend, he said.
“It’s reasonable to expect that in the future the interest rates in the economy will be lower than they are today,” Tombini said. “In the last few years, we brought inflation to a lower and more stable level, and now we need to consolidate this conquest.”
A fiscal policy that reduces Brazil’s debt-to-gross domestic product ratios also helps the central bank fight inflation, Tombini said.
A combination of a tighter fiscal policy, and a further increase in banks’ reserve requirements could mean that interest rates will rise less than traders were expecting next year, said Luiz Eduardo Portella, a partner of Banco Modal SA.
“Instead of 200 basis points, we could have 100 or 150 in total,” Portella said in a phone interview from Sao Paulo.
Brazil’s record $286 billion in foreign currency reserves are “moderate” compared with the size of the country’s economy and other emerging markets including China, South Korea and Russia, Tombini said.
The reserves accumulation policy over the past few years hasn’t affected the direction of Brazil’s real, which has fluctuated in response to market and economic forces, Tombini said.
Traders are betting Tombini will raise rates 0.5 percentage point at his first monetary policy meeting in January, Bloomberg estimates based on interest-rate futures contracts show. Policy makers increased borrowing costs this year by 200 basis points, or 2 percentage points, to 10.75 percent from a record low.
Consumer prices as measured by the benchmark IPCA-15 index rose 5.47 percent in the year through mid-November. Inflation expectations in 2011 have accelerated to 5.2 percent, from 4.8 percent in August, according to the median forecast in a Dec. 3 central bank survey of about 100 economists.
Tombini was born in Porto Alegre, in the southern state of Rio Grande do Sul. Before joining the central bank, he was senior adviser to Brazil’s executive director at the International Monetary Fund.
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