- Inflation surged as Rousseff made cheap credit more available
- Lawmakers voted 61-to-20 for president’s ouster Wednesday
Brazilian President Dilma Rousseff was booted out of office Wednesday, but the central bank will be grappling with fallout from her economic policies well after she’s gone.
Ilan Goldfajn, who took the reins at the bank in June, is coming face to face with that reality. Analysts forecast he will keep the country’s key interest rate at a decade-high 14.25 percent Wednesday, even as the economy suffers through its longest recession in more than a century.
The Massachusetts Institute of Technology-trained economist has little room to revive growth in Latin America’s biggest country because Brazil’s inflation rate is almost 9 percent, well above the central bank’s target of 4.5 percent. Consumer prices soared during Rousseff’s five and a half-year tenure as she pumped cheap credit into the economy and the nation’s currency sank.
Dilma Rousseff became the second president to be impeached in Brazil’s 31-year-old democracy, paving the way for Acting President Michel Temer to officially assume the office.
“Brazil’s inflation level doesn’t allow for anything other than a more-conservative approach from the central bank,” said Thais Zara, the chief economist at Sao Paulo-based consulting firm Rosenberg Consultores Associados. “Most of the impeachment and economic activity is already priced in, and now people expect the government to deliver on the fiscal-adjustment measures.”
Goldfajn has said repeatedly that repairing Brazil’s finances -- including reining in the country’s biggest budget deficit on record -- will determine whether the central bank can cut interest rates that are the highest among G-20 nations.
The key Selic rate has been at 14.25 percent since July 2015. The last time it was cut was in 2012, a move that was widely criticized because it pushed the rate to the lowest level in history even though inflation was above target. This prompted speculation that former central bank head Alexandre Tombini capitulated to political pressures to cut.
“Everybody now is looking for what comes next in terms of fiscal adjustment,” said Andre Perfeito, the chief economist at Sao Paulo-based brokerage Gradual Cctvm. “Ilan has to keep rates stable for now, but he is signaling that he can only deliver on an expected rate cut once the government approves measures to fix the fiscal problems.”