A Brazilian central bank survey showing interest rate levels are inconsistent with the country’s inflation target won’t alter policy makers’ strategy of lowering borrowing costs further, bank President Alexandre Tombini said.
The so-called “neutral” rate of interest needed to keep inflation on target with the economy growing at a sustainable pace is 5.5 percent, according to the median estimate in the survey of economists published Feb. 23. That is higher than the current inflation-adjusted interest rate of 4.3 percent.
“I think it will have little impact on the monetary authority’s strategy,” Tombini said, referring to the survey’s results. He spoke to reporters yesterday in Mexico City, where he’s attending a meeting of finance officials from the Group of 20 richest nations.
Tombini reiterated that there is a high chance the central bank will cut the benchmark interest rate to less than 10 percent this year, from the current 10.5 percent. The bank’s monetary policy committee next meets March 6-7.
“This strategy hasn’t changed until now,” he said.
Since August, the policy makers have cut the Selic rate four times, reduced taxes and pledged to boost public investments to ensure growth of 4.5 percent this year. The stimulus has raised concerns among economists that Tombini may fail to fulfill his pledge to slow inflation to the bank’s 4.5 percent target this year. Consumer prices rose 6.22 percent in January from a year ago.
The real neutral interest rate was 6.75 percent in November 2010, according to the median forecast in a previous central bank survey. Brazil has the highest real interest rate in the Group of 20 Nations.
Tombini said that perhaps more important than the decline in the neutral rate since the bank’s last survey is the fact that most analysts expect it to fall even further in the next two years.
“This process hasn’t ended according to the people we consulted,” he said, adding that the analysts’ perception is consistent with the bank’s current rate-cutting strategy.
Inflation slowed to 6.22 percent in January, from 6.5 percent. Analysts expect consumer prices to rise 5.24 percent this year and 5.02 percent next year, according to the median forecast in a Feb. 17 bank survey.
Tombini reiterated that the central bank will continue to buy dollars and act in the foreign exchange futures market whenever necessary. Brazil’s real has gained 9.2 percent this year, more than all 16 major currencies tracked by Bloomberg.
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