Brazil Will Maintain Low Rate Policy Next Year, Mantega Says

Brazil’s inflation rate will remain within the target range and allow a low-interest-rate policy to continue next year, Brazil’s finance minister said.

Traders are betting the central bank will have to increase its benchmark interest rate in 2013 to as high as 9 percent after cutting it by 500 basis points to 7.5 percent since August last year. Annual inflation jumped for the second consecutive month in August to 5.24 percent.

Tax cuts and energy rate reductions announced by the government will maintain inflation within the target range of 4.5 percent plus or minus two percentage points, Finance Minister Guido Mantega told reporters in Paris.

“Inflation is within the target limits and this will continue,” Mantega said. “The policy of low interest rates will continue.”

A government official close to the central bank said yesterday that policy makers won’t hesitate to raise rates next year to keep inflation in line with their target.

Brazil has room for further tax cuts as growth in Latin America’s largest economy gathers pace, Mantega said.

“We are in a solid fiscal position, which gives us some freedom to take measures to reduce costs, lower taxes and provide direct stimulus for infrastructure projects,” Mantega said.

Growth is picking up in the second half of this year and government stimulus measures will boost the economy further in 2013, Mantega said, adding that he doesn’t see a need to increase fuel prices in the near future.

Power Rates

Brazil’s government will change the inflation index used to adjust electricity rates when it renews concessions for power utilities, Mantega said.

“When the electricity contracts expire, we will also modify this indexation,” Mantega said. “We will take concrete steps to reduce indexation,” he added, referring to the common practice in Brazil of tying rate adjustments to inflation indexes.

The government is requiring power companies to cut the rates they charge consumers and industries in exchange for a renewal of concessions that expire beginning in 2015.

To contact the reporters on this story: Karen Eeuwens in London at keeuwens@bloomberg.net; Stefan Riecher in Frankfurt at sriecher@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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