Tombini Says Brazil Will Defend Itself From Capital Inflows

Brazil’s central bank President Alexandre Tombini said his country will defend itself from short-term capital flows that bring financial instability and inflation risks amid an easing push from major economies.

Destabilizing inflows in 2010 and 2011 stoked a credit boom in Brazil and undermined the central bank’s inflation fight, Tombini told reporters in Tokyo today. He was responding to a question about remarks from Federal Reserve Chairman Ben S. Bernanke, who yesterday rejected the view that U.S. stimulus policies are hurting emerging markets.

“We don’t want Brazil to be a marketplace for other countries’ devalued currencies,” Tombini said. “We have the conditions to protect ourselves and we are doing that, and we will continue to do this if it is necessary.”

President Dilma Rousseff’s government has imposed barriers on capital inflows and purchased dollars in the spot and futures markets to weaken the real and help the country’s manufacturers. The central bank’s 10 straight interest rate cuts since August last year have also helped make Brazil less attractive to short-term foreign capital compared with last year, Tombini said.

“We have an interest rate which, compared to the world, is lower,” Tombini said. “We have a more devalued exchange rate than we did then, and we have a series of measures that we adopted at that time which are still in place, to reduce Brazil’s attractiveness to short-term flows.”

Rate Cuts

The Brazilian central bank last week cut the benchmark Selic rate a quarter point to a record low 7.25 percent to try to revive the slowest growth among major emerging markets that make up the so-called BRIC nations. That’s 5.25 percentage points lower than it was when the bank began a cycle of rate cuts last year.

The real has weakened 1.1 percent since the Fed announced its latest round of quantitative easing on Sept. 13, and has fallen about 22 percent since the central bank began cutting rates in August 2011, the biggest drop of 16 major currencies tracked by Bloomberg.

Tombini said he sees “consistent indications” that a moderate recovery is under way in Brazil, as industrial output revives, capacity utilization and business confidence improve, and the country’s farms are set to deliver a record grain harvest.

Stimulus Measures

The government has complemented the central bank’s rate cuts with a series of stimulus measures, such as increasing subsidized lending by national development bank BNDES, reducing bank reserve requirements, and pressuring commercial banks to cut rates on consumer loans.

The economy’s year-on-year growth in the second quarter was 0.49 percent, slower than that of Russia, India and China, the other BRIC countries. Brazil’s growth rate slowed to 2.7 percent last year, after expanding 7.5 percent in 2010, its fastest pace in more than two decades.

The world’s biggest emerging market after China underwent a “typical business cycle downturn,” Tombini said.

The global economy will exert a disinflationary impact on Brazil over the next few years, Tombini said. Inflation is slowing toward its 4.5 percent target in a “non-linear” fashion, as short-term prices are negatively affected by supply shocks, he added.

Annual inflation in Brazil accelerated in September for a third straight month. Prices as measured by the IPCA price index rose 5.28 percent from a year earlier, the fastest pace since February.

Inflation has remained above the mid-point of the central bank’s target for the last two years, and analysts in the latest central bank survey forecast that it will end 2013 at 5.44 percent. Brazil targets inflation of 4.5 percent plus or minus two percentage points.

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