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Tombini Says Brazil Anti-Inflation Focus Affecting Funding Costs

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April 2 (Bloomberg) -- Brazilian central bank President Alexandre Tombini said monetary policy has shifted since January when policy makers voiced concern over inflation, increasing funding costs for banks.

Policy makers will wait for the March inflation figures, scheduled to be released next week, and other economic indicators before deciding upon their next steps, Tombini told senators at a public hearing in Brasilia.

“The central bank already changed its strategy, its communication,” Tombini said today. “And this to a certain degree is already reflected in the market rates, in the monetary and financial conditions, in the funding cost of financial institutions.”

Swap rates, which affect the cost of raising capital, have increased since January as traders anticipated that faster inflation would prompt Tombini to raise borrowing costs, reversing at least part of the interest-rate cuts that have marked President Dilma Rousseff’s administration. The central bank has kept the benchmark Selic at a record low since reducing it to 7.25 percent in October in a bid to revive economic growth even as inflation accelerates.

Tombini’s comments that the central bank’s stance was already raising borrowing costs led investors to reinforce bets policy makers will wait until May to raise the Selic, given signs the economy is still recovering at a slow pace.

Swap rates on the contract due in January 2014, the most traded in Sao Paulo today, fell 4 basis point to 7.74 percent at 1:36 p.m. local time. The real was little changed at 2.0210 per U.S. dollar.

Industrial Output

“Tombini left a feeling that there is no decision made about interest rates, that rates will go up, but it is not pressing,” Paulo Gala, a strategist with Fator Corretora, said in a phone interview. “He emphasized that the adjustments in swap rates are already part of the monetary policy move.”

Industrial production contracted in February by the most since December 2008, the statistics agency said today. The 2.5 percent drop in output prompted traders to reduce bets that the central bank would raise rates this month to tame inflation that is approaching the 6.5 percent upper limit of the target range.

“It’s an inflation scenario that the central bank is certainly watching with care,” Tombini said. “We are looking at the inflation resilience in the short term, we know that there are factors that will mitigate inflation, but it has shown a certain resilience.”

Prices increase in the service industry have accelerated, food costs continue to pressure inflation and the outlook has risks, Tombini told senators at a hearing today in Brasilia.

Above Target

Annual inflation in Latin America’s largest economy jumped to 6.31 percent in February from 6.15 percent the month prior. Inflation is more widespread and resistant due to seasonal and transportation price increases, the bank’s director for economic policy, Carlos Hamilton, said on March 28.

Inflation will breach the 6.5 percent upper limit of the government’s target in June, before slowing, according to estimates by the central bank. It targets inflation of 4.5 percent, plus or minus two percentage points.

Brazil’s economy will grow at least 3 percent this year, Finance Minister Guido Mantega said last month. The country’s gross domestic product expanded by 0.9 percent and 2.7 percent in 2012 and 2011, respectively.

To contact the reporters on this story: Matthew Malinowski in Santiago at mmalinowski@bloomberg.net; Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net

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

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