Brazil is adopting a policy mix that has a dual goal of fueling economic growth at the same time as it brings inflation back to target, central bank President Alexandre Tombini said.
The world’s second biggest emerging market after China has been expanding below potential since the third quarter, Tombini said in Senate testimony today in Brasilia. That sub-par performance allows policy makers to cut interest rates without jeopardizing their 4.5 percent inflation target, he said.
Since August, President Dilma Rousseff’s administration reduced the overnight rate four times, cut taxes on consumer goods and pledged to boost public works to ensure 4.5 percent growth this year. In the third quarter, Latin America’s biggest economy shrank for the first time in more than two years. While slower growth helped contain consumer price increases, inflation has remained above the target for the past 17 months.
Tombini said that below potential growth was “one of the reasons we are adjusting the interest rate.” The government adopted “an economic policy mix that is compatible with faster economic growth and the convergence of inflation to target,” he added.
The yield on the interest rate futures contract maturing in January 2014 fell nine basis points, or 0.09 percentage point, to 9.76 percent at 12:41 a.m. in Brasilia. The real strengthened 0.3 percent to 1.7021 per U.S. dollar.
Tombini, at the Group of 20 meetings last weekend in Mexico City, reiterated policy makers’ view that there is a high chance they will cut the benchmark interest rate to less than 10 percent. Since August, the central bank has reduced the Selic rate by 200 basis points to 10.50 percent to shield Brazil from the Euro debt crisis.
Economic growth will accelerate in the second half of the year, and inflation is slowing toward the target, Tombini said today.
The Finance Ministry estimates that growth domestic product grew 3 percent last year, despite a 0.04 percent contraction in the third quarter from the three previous months.
Traders are betting the central bank will cut the Selic to at least 9.25 percent by July, according to Bloomberg estimates based on interest rate futures.
Policy makers will need to reverse course and raise rates again to 11 percent next year to prevent inflation from picking up, futures also show.
“The central bank is making a huge effort to show that economic fundamentals and the current situation opens room for lower rates in Brazil,” Andre Perfeito, chief economist at Gradual Investimentos, said in a phone interview from Sao Paulo. “Tombini’s presentation suggests there is room for lower rates.”
Analysts covering Brazil raised their 2013 inflation forecast to the highest on record, according to a central bank survey published yesterday. Consumer prices will rise 5.11 percent in 2013, after jumping 5.24 percent this year, the survey shows.
Brazil’s inflation-adjusted interest rate, the highest within the G-20, is too low to help the nation meet its price-growth target, a central bank survey of economists published Feb. 23 showed.
The real interest rate 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. That is higher than Brazil’s current real rate of 4.3 percent.
Tombini said today that the most salient result of the survey is that analysts see the neutral rate in a declining trend.