Brazil Central Bank Prodded to Line Up With Government's Goals

The Brazilian central bank doesn’t have “absolute” autonomy because its policy to fight inflation needs to take into account the government’s employment and income goals, said Ricardo Berzoini, a member of President Dilma Rousseff’s cabinet.

The central bank board, which kept interest rates unchanged last month, said today inflation will remain above its target for at least two more years. It paused after carrying out the world’s longest tightening cycle that failed to slow inflation and contributed to slower economic growth before general elections in October.

“Political intelligence is to practice a conceptual degree of independence that isn’t absolute,” Berzoini, minister of institutional relations, said in an interview in Brasilia. “The central bank fights inflation knowing the government has guidelines for inflation, employment and income.”

Equity markets have rallied as public opinion polls published since late March show Rousseff’s lead narrowing amid slower economic growth and rising cost of living. Investors forecast candidate Aecio Neves, who is polling second, would contain fiscal spending and grant the central bank greater autonomy to fight inflation.

Rousseff’s Lead

Rousseff’s lead over Neves shrank to 18 percentage points this month from 23 percentage points in April, according to a June 13-15 Ibope poll that pitted her against potential competitors. The survey of 2,002 people has a margin of error of 2 percentage points.

The Ibovespa Sao Paulo Stock Exchange index has increased 6.1 percent since April.

Neves’s Brazilian Social Democracy Party, or PSDB, always chose to increase the burden on poorer people when its leader Fernando Henrique Cardoso ruled Brazil from 1995 to 2002, said Berzoini, the minister who represents the government in negotiations with Congress. He is one of four cabinet members of a total 39 whose office is in the presidential palace. He is the former president of the ruling Workers’ Party.

The PSDB implements more fiscally responsible policies, which do more to contain consumer price increases and stimulate growth than current measures, Antonio Imbassahy, the PSDB leader in the lower house, said by phone today.

‘Social Inequality’

“The best way to combat social inequality is to control inflation, something Dilma’s government hasn’t accomplished,” he said.

Rousseff less than two years after entering office demanded banks reduce interest rates charged to customers and bring profits down to what she called “civilized” levels. Central bank President Alexandre Tombini, who inherited a key rate of 10.75 percent, cut it to a record-low 7.25 percent in October 2012, the month after Rousseff’s comment.

The central bank’s press office declined to comment on the institution’s autonomy.

The central bank in April 2013 started the world’s longest tightening cycle, raising borrowing costs by 375 basis points in nine straight meetings as inflation twice last year breached the ceiling of the 2.5 percent to 6.5 percent target range. It kept the benchmark Selic rate unchanged at 11 percent last month even as consumer prices rose 6.37 percent.

Second Term

Rousseff accepted her party’s nomination for re-election last week, saying a second term would usher in a new cycle of development based on economic soundness and social policies. The most popular policies will be expanded, and the government would do what is possible in a second term given global trends to encourage growth and keep inflation under control, Berzoini said.

“The second term isn’t the moment to present a huge number of managerial novelties,” Berzoini said.

Inflation will end 2014 at 6.4 percent if policy makers continue to keep the Selic unchanged, the central bank wrote in its quarterly inflation report published today. That compares with a 6.1 percent estimate in the March report.

Policy makers also cut their 2014 economic growth forecast to 1.6 percent from 2 percent. Unemployment in April fell to 4.9 percent from 5.8 percent the prior year.

“The government didn’t neglect inflation, but it didn’t fight it in an orthodox way that generates unemployment and crimps wages,” Berzoini said.

To contact the reporters on this story: Anna Edgerton in Brasilia at aedgerton@bloomberg.net; Arnaldo Galvao in Brasilia Newsroom at agalvao1@bloomberg.net

To contact the editors responsible for this story: Andre Soliani at asoliani@bloomberg.net Randall Woods

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