Tombini Says Brazil Working to Limit Price Impact of Weaker Real

Brazil’s central bank President Alexandre Tombini said policy makers are working to reduce the inflationary pressure that may stem from a drop in the real, the worst performing major currency in the past month.

Brazil is prepared to face the “adverse winds” of a stronger dollar and has the capacity to make the currency market function adequately, Tombini told the Senate’s Economic Affairs Committee in Brasilia today. Speculation that the U.S. Federal Reserve may dial back its asset-buying program has strengthened the dollar worldwide, including against the real, which touched a four-year low today.

“The actions of the central bank are meant to consolidate lower inflation and mitigate the effects of the dollar’s strengthening in relation to the real,” Tombini said. “A flexible exchange rate regime and the adequate management of monetary policy reduce the possible pass-through of currency depreciation to inflation.”

Brazil’s central bank today intervened in the currency market for the eighth time in June to arrest the real’s slide. Finance Minister Guido Mantega this month lifted taxes on bets against the dollar in the futures market and foreign purchases of Brazilian debt as a means of boosting liquidity. Still, Brazil’s currency has fallen 6.4 percent over the last month.

President Dilma Rousseff’s administration is caught between inflation at the upper limit of the central bank’s target range and growth that has fallen short of economists’ forecasts for five straight quarters. Her government this year extended tax cuts and subsidized credit lines to fuel recovery, while the central bank started raising interest rates in April to cool consumer prices.

Swap Rates

Swap rates on the contract due in January 2014, the most traded in Sao Paulo today, rose nine basis points, or 0.09 percentage point, to 8.97 percent at 4:10 p.m. local time. The real weakened 0.3 percent to 2.1776 per U.S. dollar.

The world’s second-biggest emerging market expanded 0.55 percent in the first three months of 2013, missing economists’ forecasts of a 0.9 percent increase.

Economists have cut their 2013 growth forecast for five straight weeks to 2.49 percent from 3 percent on May 10, according to the latest weekly central bank survey. The bank forecasts 3.1 percent expansion this year.

Consumer prices rose 6.50 in May from last year, compared with 6.49 percent in April. Inflation prompted policy makers to double the pace of benchmark rate increases last month by raising the Selic 50 basis points to 8 percent. The central bank targets inflation at 4.5 percent plus or minus two percentage points.

Tombini said annual inflation will probably accelerate in the short term, before receding in the second half.

“I can assure you that the central bank is vigilant and will do what it takes, in a timely way, to put inflation in a declining path in the second half,” Tombini said today.

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