Brazil’s central bank signaled current inflation levels will prevent policy makers from reducing borrowing costs even as the economy heads to its longest recession since 1931.
“Even if the BCB’s own forecasts point to inflation below target at its chosen conversion horizon with inflation expectations well anchored, it should only entertain policy accommodation when current inflation is significantly lower than present levels,” central bank director Tony Volpon said in the text of an Aug. 20 speech posted on the bank’s website.
Policy makers will have to keep the benchmark Selic at its current level for a sufficiently long period of time to fulfill their pledge of bringing inflation back to the 4.5 percent target by the end of next year, Volpon said.
“Unacceptably high inflation is Brazil’s starting point,” he said. Policy makers need to focus more on the risks of inflation accelerating than the uncertainties that could help slow inflation, he said.
The central bank has lifted the key rate in the past seven meetings to combat inflation running at more than double the official target. At the same time, the government has raised taxes and cut spending in an effort to narrow the country’s budget deficit. The policies, aimed at restoring confidence in the economy, have further jeopardized growth in 2015 and 2016.
“Volpon basically rules out any rate cutting cycle starting this year, since annual inflation will be running high until December,” Carlos Kawall, chief economist at Banco Safra, said by phone.
Brazil’s economy will shrink by 2.01 percent in 2015 and by 0.15 percent in 2016, according to the Aug. 14 central bank survey of about 100 analysts. That marks the first time they forecast recession for next year.