Brazilian inflation remains at an “uncomfortable” level and policy makers must be “especially vigilant” to mitigate pressure of a weaker currency on prices, central bank President Alexandre Tombini said today.
The economy is recovering gradually and increased investment is promising, Tombini said during a congressional hearing in Brasilia. Conditions are being created for fiscal policy to become neutral for the economy and inflation rather than expansionary, he said.
A floating currency is the best protection against shocks, and the central bank could offer more swaps auctions in the exchange market as needed, he said. Inflation has been fanned by a weaker real, which dropped to a nearly five-year low before officials announced a $60 billion intervention program Aug. 22.
“In the medium and long term, that movement will benefit the Brazilian economy, though in the short term it constitutes an inflationary pressure,” Tombini said about the real’s depreciation. “Monetary policy needs to be especially vigilant so that this pass-through doesn’t reach the consumer with force,” he said later in the hearing.
Policy makers have pledged to slow price increases that have curbed demand and investments in the world’s second-largest emerging market. Central bankers have lifted the key rate 1.75 percentage points this year after inflation surpassed the upper limit of their target range for the first time since 2011.
Swap rates on the contract due in January 2015 fell 25 basis points, or 0.25 percentage point, to 10.11 percent. The real rose 3.2 percent to 2.1860 per U.S. dollar. The currency has declined 9.2 percent in the past six months, the most among 16 major currencies tracked by Bloomberg.
Tombini said markets today were responding positively to the U.S. Federal Reserve’s decision to refrain from reducing the $85 billion pace of monthly bond buying. Economists had forecast it would dial down monthly Treasury purchases by $5 billion, according to a Bloomberg News survey.
The international rise of the dollar has some pass-through to the domestic economy, Tombini said, adding the bank’s program to auction swaps has helped revert the depreciation of the real.
The central bank this year has lifted the key rate the most of any major world economy tracked by Bloomberg. Policy makers, who raised rates by a half-point to 9 percent at their Aug. 27-28 meeting, consider the current pace of tightening to be appropriate, they said in the minutes of that gathering.
Inflation measured by the IPCA index in August slowed to 6.09 percent, the slowest since December. Analysts polled by the central bank have increased their 12-month inflation estimates for 11 straight weeks, to 6.21 percent. Tombini said today the bank hopes inflation will converge more toward the target this month.
Policy makers target 4.5 percent inflation, plus or minus two percentage points.
Economic expansion in Latin America’s largest economy has been inconsistent. While retail sales in July jumped 1.9 percent, almost 10 times above economists’ forecasts, industrial production in the same month contracted the most since February.
The central bank’s economic activity index, a proxy for gross domestic product, contracted 0.33 percent in July, compared with a median estimate by economists surveyed by Bloomberg for a 0.6 percent decline.
Brazil’s economy will expand 2.7 percent this year after climbing 0.9 percent in 2012, according to the latest central bank estimates. Policy makers will publish updated forecasts in their quarterly inflation report this month.