Tombini Sees Brazil Prices on Target Without Rate Increase

Brazil’s central bank President Alexandre Tombini said keeping the key interest rate unchanged for a “prolonged time” is still the best strategy to ensure inflation will slow to its target next year.

Tombini said today there is no need to change the bank’s policy strategy outlined after it cut rates Oct. 10 to a record 7.25 percent, because it already took into account the lower primary surplus announced by the government yesterday. He also said the recent jump in prices doesn’t threaten the government’s 4.5 percent inflation target because wholesale prices are already dropping.

Policy makers are signaling the government will rely on alternative tools, such as tax cuts, to keep inflation under control without raising the Selic rate, said Enestor dos Santos, an economist at Banco Bilbao Vizcaya Argentaria SA in Madrid. While Bloomberg estimates show traders see more than a 30 percent chance of Tombini being forced to raise rates in May, Dos Santos forecasts that borrowing costs will remain at an all-time low until at least December 2013.

“Our projections are still valid: the convergence of inflation to the mid-point of the target in the third quarter of next year with this monetary policy strategy,” Tombini said in an interview from the central bank’s headquarters in Brasilia. After policy makers reduced the benchmark rate last month, they “signaled that the best strategy from there on was to keep the stability of the monetary conditions for a sufficiently prolonged time.”

‘Inflation Relief’

While inflation accelerated for a second straight month in October, prices as measured by the IGP-DI index, which is 60 percent weighted to the wholesale sector, dropped for the first time in 10 months.

Consumer prices rose 0.59 percent in October, up from 0.57 percent in September, the national statistics agency said today. Annual inflation accelerated to 5.45 percent.

Prices were fueled by a commodities supply shock stemming from adverse climatic conditions, Tombini said.

Brazil arrived at an inflation peak this month and is already seeing signs of price increases slowing to lower levels, Finance Minister Guido Mantega said to reporters today.

The IGP-DI inflation index plunged 0.3 percent, led by a 1.9 percent drop in raw materials and 1.3 percent fall in agricultural goods, the Getulio Vargas Foundation said today.

Wholesale prices suggest “inflation relief is on the way,” Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA, said by telephone from Sao Paulo. “That could help keep interest rates on hold in 2013.”

Balancing Act

The central bank has cut its benchmark lending rate since August 2011 by 525 basis points, the most among the Group of 20 nations, in a bid to revive a flagging economy.

President Dilma Rousseff’s administration has also extended tax cuts for consumer and industrial goods, cut bank reserve requirements to boost lending, pressured banks to reduce spreads and increased public spending to spur demand.

Government tax cuts have made it more difficult to reach the primary surplus target of 139.8 billion reais ($68.7 billion), or about 3.1 percent of gross domestic product, Finance Minister Guido Mantega said to reporters in Brasilia.

Tombini said the central bank forecasts that faster economic growth next year will allow the government to fully meet its 2013 fiscal target.

‘Focus Has Changed’

As part of the growth revival plan, Rousseff also ordered cuts on energy rates that could reduce inflation by as much as 0.6 percentage points next year, BBVA’s dos Santos said. He forecasts inflation will slow to 5.3 percent next year.

“Inflation won’t be nearing the 6.5 percent upper limit of its target next year because of measures like this,” Dos Santos said. “The government will use all available tools to keep interest rates unchanged.”

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo, were unchanged at 7.33 percent at 3:58 p.m. local time.

Economists surveyed by the central bank forecast the economy will grow 1.54 percent this year and 4 percent expansion in 2013.

Faster growth may force the bank to reverse course and start increasing rates in October, according to Jankiel Santos, chief economist at Banco Espirito Santo Investment Bank, who estimates inflation will accelerate to 5.5 percent next year.

“Apparently for the moment we have changed from an inflation target regime to an economic activity target regime,” Santos said by phone from Sao Paulo on Nov. 6. “We don’t believe that is wrong, but you should at least warn people that your focus has changed, and it has not been the case in terms of the central bank.”

Economists cut their 2012 inflation forecast for the first time since July, to 5.44 percent, according to the median estimate in the latest central bank survey of about 100 economists.

“The information we have on Brazil’s inflation gives support to the central bank’s view,” Tombini said.

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