Brazil Plans to Make Room for More Elastic Monetary Policy and Cut Budget

Brazil will make room for a more “flexible” monetary policy as the government seeks to ensure economic growth of at least 4 percent this year, Finance Minister Guido Mantega said.

President Dilma Rousseff will cut enough of its 2012 budget to ensure the government meets its target of a budget surplus before interest payment of 139.8 billion reais ($79.7 billion), Mantega told reporters yesterday. He said the government will keep in place a “solid” fiscal policy even as it expands public investment this year to fuel growth, adding the size of the budget cut will be announced in mid-February.

“The budget cut will be enough to meet the fiscal target, keeping the current direction that makes room for a more elastic monetary policy,” Mantega said after a Cabinet meeting with Rousseff. We will “give continuity to the change in the fiscal and monetary policy mix we implemented in 2011, in which monetary policy can be more flexible and the fiscal policy more rigorous.”

The government will rely on credit expansion, lower borrowing costs, an increase in public investment, policies to prevent the currency from appreciating and a responsible fiscal stance to shore up economic growth amid Europe’s debt crisis, Mantega said. Since August, Rousseff’s economic team has lowered the benchmark interest rate four times, lifted credit curbs and reduced taxes on consumer goods and foreign investment as part of a plan to offset slower global growth.

Expectations

Traders are wagering the central bank will lower the overnight rate to as low as 9.75 percent by May, interest rate futures show. The yield on interest rate futures contract maturing January 2013, the most traded in Sao Paulo, rose 4 basis points, or 0.04 percentage point, to 9.86 percent yesterday, after dropping for three consecutive days.

“Mantega is talking about this to allow room for interest rates to further drop,” Andre Perfeito, chief economist at Sao Paulo-based Gradual Investimentos, said in a phone interview. “The 4 percent growth is not feasible.”

The central bank has reduced its benchmark interest rate by a half percentage point at each of its last four meetings as part of a plan to shield the economy from a global slowdown. Policy makers, who lowered the Selic rate to 10.5 percent last week, signaled they will cut borrowing costs at the current pace when they meet in March again.

Brazil has taken the lead among emerging markets in cutting borrowing costs as the economy shrank in the third quarter for the first time since 2009. The move has since been followed by policy makers in Russia, Indonesia, Chile and Israel.

Economy, Inflation

Brazil’s economy shrank 0.17 percent on an annualized basis in the third quarter, the first contraction since the collapse of Lehman Brothers Holdings Inc. in 2008, while industrial output has fallen for five of the last eight months.

While annual inflation has slowed in the past three months to 6.5 percent in December, analysts expect central bank President Alexandre Tombini to fail in his pledge to bring consumer price increases back to the 4.5 percent mid-point of the bank’s target in 2012, a central bank survey shows.

Analyst forecast consumer prices will rise 5.29 percent this year and 5 percent in 2013, according to the median forecast in a Jan. 20 central bank survey.

Real

Mantega also said the government will keep in place policies to prevent the real from gaining in a bid to protect local manufacturers from imports.

The real has gained 6.4 percent this year, the best performer among the 16 most-traded currencies. It was little changed at 1.7550 per U.S. dollar yesterday.

“We have a big challenge because our industry is losing ground,” Mantega said. “We won’t allow the currency to appreciate. We will take measures against countries that implement a predatory competition.”

Mantega said credit needs to expand 15 percent to 17 percent this year to ensure the government’s growth target.

The central bank estimates credit expanded 17.5 percent last year and will grow 15 percent in 2012, Tulio Maciel, the head of the central bank’s economic research department, told reporters Dec. 21.

“The important thing is for credit to grow and the financial costs to drop. We will take a series of measures,” Mantega said.

To contact the reporter on this story: Carla Simoes in Brasilia at csimoes1@bloomberg.net, Andre Soliani in Brasilia at asoliani@bloomberg.net

To contact the editor responsible for this story: Robert Jameson at rjameson@bloomberg.net

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