Tombini Says Brazil Ready to Shift Monetary Policy If Needed

Brazilian central bank President Alexandre Tombini said policy makers could adjust monetary policy as needed as they seek to reassure investors the government won’t refrain from raising interest rates to keep consumer prices tamed.

“When necessary, if supported by the prospective scenario for inflation, the posture of the central bank in relation to monetary policy will be adequately adjusted,” Tombini said at an event in Brasilia.

After inflation accelerated more rapidly than economists expected in January, policy makers have expressed more concern about the pace of consumer price increases. Tombini’s comments signaled that the central bank stands ready to tighten monetary policy, said Nick Chamie, global head of foreign exchange strategy and emerging markets research at RBC Capital Markets.

“They don’t want people to think that hiking interest rates is off the table,” Chamie said in a telephone interview from Toronto. “They want to anchor inflation expectations and bolster the confidence and the credibility in keeping inflation around the target.”

Record Low

Policy makers have held the benchmark Selic rate at a record low of 7.25 percent since October. In the minutes to their last meeting on Jan. 15-16, policy makers stated that the best path to cooling inflation without jeopardizing growth is to keep rates at the current level for a “sufficiently prolonged period.”

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo, pared their earlier decline and dropped three basis points, or 0.03 percentage point, to 7.70 percent at 3:01 p.m. local time. The real strengthened 0.4 percent to 1.9557 per dollar.

An unexpected decline in December retail sales had pushed swap rates down by the most in two months, as traders bet a struggling economic recovery could prevent the central bank from raising borrowing costs.

While Tombini said there is no risk of inflation in Brazil going out of control, he did not rule out the possibility of a tightening cycle.

“The bank has communicated its strategy, a strategy that remains valid at this moment,” Tombini said. “On the other hand, that obviously does not mean that monetary cycles have been abolished.”

The bank has not yet decided on the timing of a rate increase, said Luciano Rostagno, chief strategist at Banco WestLB do Brasil. “Tombini signaled that in the medium term he can increase rates, depending on the next inflation data,” Rostagno said by telephone from Sao Paulo.

Inflation as measured by the IPCA index accelerated to 6.15 percent in January, and has been above the midpoint of the central bank’s target range for the past 29 months. The bank targets inflation of 4.5 percent plus or minus two percentage points.

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