Brazil’s inflation remains at an “uncomfortable” level and monetary policy will help mitigate the pressure of a weaker currency on prices, according to central bank President Alexandre Tombini.
The economy is recovering gradually and increased investment is promising, Tombini said today during a congressional hearing in Brasilia. The central bank could offer more swaps auctions in the exchange market, as needed, he said.
Brazil’s policy makers have pledged to slow price increases that have curbed demand and investments in the world’s second-largest emerging market. Central bankers have lifted the key rate 1.75 percentage points this year after inflation surpassed the upper limit of their target range for the first time since 2011. Inflation has been fanned by a weaker real, which dropped to a nearly five-year low before officials announced a $60 billion intervention program on Aug. 22.
“In the medium and long term, that movement will benefit the Brazilian economy, though in the short term it constitutes an inflationary pressure,” Tombini said regarding the weaker real. “Execution of monetary policy will limit the pass-through of the currency’s devaluation to inflation.”
Swap rates on the contract due in January 2015 fell 27 basis points, or 0.27 percentage point, to 10.09 percent at 4:53 p.m. local time. The real rose by 2.9 percent to 2.1918 per U.S. dollar, hitting its strongest level since late June. The currency has declined 0.5 percent in the past three months, the third-most among 16 major currencies tracked by Bloomberg. Tombini said the bank’s program to auction swaps has helped revert the depreciation of the real.
The central bank this year has lifted the key rate the most of any major world economy tracked by Bloomberg. Policy makers, who raised rates by a half-point to 9 percent at their Aug. 27-28 meeting, consider the current pace of tightening to be appropriate, they said in the minutes of that gathering.
Inflation measured by the IPCA index in August slowed to 6.09 percent, the lowest since December. Analysts polled by the central bank have increased their 12-month inflation estimates for 11 straight weeks, to 6.21 percent. Tombini said today the bank hopes inflation will converge more toward the target this month.
Policy makers target 4.5 percent inflation, plus or minus two percentage points.
Economic expansion in Latin America’s largest economy has been inconsistent. While retail sales in July jumped 1.9 percent, almost 10 times above economists’ forecasts, industrial production in the same month contracted the most since February. The central bank’s economic activity index, a proxy for gross domestic product, declined 0.33 percent in July, compared with a median estimate for a 0.6 percent fall from economists surveyed by Bloomberg.
Brazil’s economy will expand 2.7 percent this year after climbing 0.9 percent in 2012, according to the latest central bank estimates. Policy makers will publish updated forecasts in their quarterly inflation report this month.
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