OECD Says Brazil Central Bank Needs Greater Independence

Brazil needs to increase the independence of its central bank and should raise interest rates to meet its inflation target, the Organization for Economic Cooperation and Development said in a report.

Policy makers need to establish fixed terms for the central bank directors and its governor, the OECD said in its Economic Survey on Brazil report sent by e-mail today. Communication regarding interest rates should be limited to the central bank, it said.

Brazil’s policy makers reduced the Selic rate to a record low last October as President Dilma Rousseff vowed to lower borrowing costs to “civilized” levels. Officials have since raised benchmark borrowing costs more than any other major economy tracked by Bloomberg. Statements on interest rates from officials outside the central bank risk confusing market participants and hurting policy makers’ independence, according to the OECD.

“Both could result in inflationary expectations becoming unanchored from the inflation target,” according to the report.

Brazil’s policy makers should continue raising the Selic to bring inflation to target and bolster policy credibility, according to the OECD. Inflation has remained above the 4.5 percent target for three years.

The central bank has raised the benchmark Selic by 225 basis points, or 2.25 percentage points, since April. That’s 75 basis points more than Indonesia, the only other major world economy tracked by Bloomberg that has lifted borrowing costs from last year’s levels.

‘Right Direction’

“These are steps in the right direction,” the report said. “Under the assumption that the economic upturn continues, the Selic rate should be raised further as needed to ensure that inflation returns to the target.”

The OECD also recommended boosting budgetary transparency by limiting “quasi-fiscal operations” and raising retirement ages.

The government in 2012 tapped state company dividends and discounted some investments to help meet its primary budget surplus target. Officials this year lowered the 2013 primary budget surplus target by 0.8 percentage point and proposed a 12 percent spending increase for 2014. The primary target excludes interest payments.

“Sometimes we had a bit worse results, but even so better than many countries,” Finance Minister Guido Mantega told reporters in Brasilia today about Brazil’s fiscal policy when asked about the OECD report.

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