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Taming Brazil CPI Requires ‘Prolonged’ Effort, Tombini Says

Brazil’s central bank President Alexandre Tombini said that slowing inflation back to target next year will require a “prolonged” and incisive effort. Yields on longer-dated interest rate future contracts extended declines.

“The issue of bringing inflation back to the target will require a prolonged effort by the government, by the central bank certainly,” Tombini said at an event in Brasilia today. “This has been determined and will be pursued in a consistent and incisive way.”

Brazilian policy makers in a less than unanimous vote last week slowed the pace of rate increases, after raising borrowing costs a full percentage point at their past two meetings. President Dilma Rousseff’s government is relying on a mix of higher borrowing costs, steps to curb credit and currency inflows and spending cuts in a bid to bring inflation from the fastest pace in 29 months back to target in 2012.

Speaking at the same event today in Brasilia, Rousseff said her administration was ready to take the necessary measures to tame inflation, and Finance Minister Guido Mantega said the government had to use “all weapons” to rein in consumer prices. The comments signaled Rousseff’s economic team is not at ease with inflation, Diego Donadio, Latin America strategist at BNP Paribas in Sao Paulo, said.


Yields on interest rate futures maturing January 2014 fell 10 basis points to 12.75 percent at 4:06 p.m. New York time. The contract, which rose two basis points earlier in the day, fell as much as 12 basis points after the comments by Rousseff, Mantega and Tombini.

“It lifted the feeling that inflation would quicken and nobody would do anything,” Donadio said in a phone interview. “The speech was hawkish.”

Still, Donadio said he has some reservations about the speech given that the central bank’s decision to slow the pace of interest rate increase to a quarter point from a half point “isn’t incisive.”

Policy makers raised the overnight rate to 12 percent from 11.75 percent April 20. Forty-one economists surveyed by Bloomberg expected a half-point increase, 15 projected a 0.25-point increase and two forecast a rate pause.

Dual Challenge

Brazil targets annual inflation of 4.5 percent, plus or minus two percentage points. Inflation will surpass the upper limit of the target between July and August, as the central bank uses the range to accommodate price shocks, Carlos Hamilton, the bank’s director of economic policy, said last month.

Consumer prices as measured by the IPCA-15 index rose 6.44 percent in the year through mid-April, the national statistics agency said last week. Brazil’s mid-month inflation rate rose 0.77 percent in April from March.

Tombini said the central bank faces a dual challenge of reining in consumer prices while dealing with “intensive foreign capital inflows,” which help fuel inflation. He also said that broad international liquidity adds to inflationary pressures in Brazil. “Unfortunately, the inflationary impact of the capital inflows can’t be dealt through interest rates,” Tombini said.

Brazil has chosen so-called macro-prudential measures, such as higher taxes on foreign loans and bond sales abroad, as the adequate tools to deal with foreign capital inflows, Tombini said in the speech today.


Consumer prices in Brazil are being fueled by a jump in commodity prices and by domestic factors as well, Tombini said today. Services inflation has remained high, reflecting a heated economy, he said.

“We should not spare weapons,” Mantega said today. “We need to use all possible weapons against inflation, be it monetary weapons, be it fiscal weapons.”

The central government announced today a wider-than-expected surplus before interest payment in March, a figure that also eased bets in the futures market that the government isn’t doing enough to control inflation, Donadio said.

The primary surplus widened to 9.1 billion reais ($5.8 billion), compared with a median estimate of 8.2 billion reais in a Bloomberg survey of 13 analysts.

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