Brazil Says Monetary Policy Not Best Tool to Lift Growth Now

Brazil’s central bank said additional monetary policy stimulus will fail to boost economic growth that is recovering more slowly than expected due to limited supply. Swap rates rose.

Policy makers, in the minutes to their Jan. 15-16 meeting published today, said the balance of risks for inflation has worsened and reiterated that the best policy for bringing consumer price increases to the 4.5 percent target is to keep rates at a record low for a “sufficiently prolonged period.”

While inflation is slowing in Mexico and Chile, price pressures are building in Brazil as demand remains robust amid record low interest rates and unemployment. At the same time, a contraction in investment and industrial output is offsetting President Dilma Rousseff’s efforts to revive the slowest growth in three years by stimulating consumption.

The central bank “considers that the recovery of domestic economic activity, which is slower than expected, is essentially due to supply limitations,” the minutes said. “Given their nature, these impediments cannot be addressed by monetary policy, which is by definition an instrument to control demand.”

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, rose eight basis points, or 0.08 percentage point, to 7.94 percent at 12:40 p.m. local time. The real strengthened 0.2 percent to 2.0326 per U.S. dollar.

Improve Productivity

Brazil should focus on measures that will help boost output, given demand “continues to grow at very dynamic rates,” central bank President Alexandre Tombini said in Davos yesterday, according to an audiotape circulated by his press office.

The bank’s board, led by Tombini, voted unanimously in January to hold the benchmark Selic rate at 7.25 percent for the second straight meeting. While the bank estimates Brazil’s $2.5 trillion economy grew 1 percent last year, the slowest among major emerging markets, policy makers kept borrowing costs steady as food price shocks and consumer demand caused inflation to accelerate faster than economists’ forecasts for the seventh straight month through mid-January..

“The minutes reinforce the idea that rates are going nowhere for the time being,” Neil Shearing, chief emerging markets economist at Capital Economics Ltd, said in an interview from London.

It’s Time

Tombini is saying that the central bank has done what it could to boost growth and now it’s time for measures to raise productivity of Brazilian companies, Shearing said from London.

While investments remain fragile due to increased uncertainty and a slow recovery in confidence, domestic demand will continue to be fueled by low interest rates, moderate credit expansion, government social spending and a tight labor market, the central bank said in today’s minutes.

Rousseff today implemented energy price cuts to consumers and industry that were deeper and took effect earlier than expected in a move to increase competitiveness and tame inflation.

The government has also cut taxes on payrolls and consumer goods, eased reserve requirements for banks that provide credit for capital goods investment and announced plans to attract billions of reais in infrastructure investments. So far, the world’s sixth-largest economy has responded unevenly to the stimulus measures.

Capital Goods

Retail sales in November increased for the sixth straight month and grew 8.4 percent over the same period last year, while industrial production in November fell for the second time in three months on lower capital goods investments. Analysts covering Brazil have cut their 2013 growth forecasts in 9 of the last 10 weeks, to 3.19 percent, according to the latest weekly central bank survey.

Inflation quickened to 6.02 percent through mid-January, the national statistics agency said yesterday. Annualized consumer price increases have exceeded the central bank’s target for the last 29 months.

“Inflation remains under control,” Tombini said yesterday in Davos. “Inflation is resilient in the short-run. In the second half of the year, it will begin its convergence” to the 4.5 percent target.

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