Tombini Says Sound Fiscal Policy Is Pivotal for Brazil President

Brazil central bank President Alexandre Tombini said adopting a “sound fiscal policy” is a priority for the country, as the government prepares to disclose its public spending plans for this year.

President Dilma Rousseff traveled to Davos last week to reassure investors wary of Brazil’s deteriorating fiscal accounts. She said Brazil will soon release revised fiscal targets for this year that will ensure debt levels remain under control. Standard & Poor’s in June placed Brazil’s rating on negative outlook, and Moody’s Investors Service in October lowered its outlook to stable from positive, citing a deteriorating debt profile and evidence of slow growth.

Brazil’s budget deficit widened to 140.8 billion reais ($58.4 billion) in the 12 months through November from 98 billion reais two year ago as the government cut taxes and increased spending to revive growth. At the same time, the central bank embarked on the world’s biggest tightening cycle in a bid to slow above-target inflation.

“For the president to speak about this issue is a demonstration that fiscal policy is an area of priority and sound fiscal policy going forward is a key policy area for Brazil,” Tombini said today at an event in London in reference to Rousseff’s speech on Jan. 24.

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, were up one basis point to 11.14 percent at 12:52 p.m. local time. The real weakened by 0.5 percent to 2.4098 per U.S. dollar.

Higher Rates

The bank on Jan. 15 lifted the benchmark Selic by 50 basis points to 10.50 percent, the seventh straight increase in borrowing costs. In the minutes to the meeting, central bankers said it was “appropriate” to maintain the current pace of rate increases, repeating language used to justify the previous six half-point boosts.

“Monetary policy works in Brazil and we will see more of that going forward,” Tombini said today. “As current inflation feels the heat of monetary policy that has already been implemented, we will see inflation expectations progressing in a more adequate way.”

Brazil’s central bank will lift the benchmark Selic to 11 percent this year, up from the previous week’s forecast of 10.75 percent, according to the Jan. 24 central bank survey of about 100 analysts published today. Economists increased their 2014 inflation forecast to 6.02 percent from 6.01 percent, while boosting their expectations for 2015 to 5.7 percent from 5.6 percent.

Determined

Annual inflation through mid-January slowed to 5.63 percent from 5.85 percent the month prior and 6.67 percent in mid-June, the national statistics agency said on Jan. 23. On the month, inflation slowed to 0.67 percent from 0.75 percent in mid-December.

Brazil is “determined” to meet the 4.5 percent midpoint of the inflation target range, Rousseff said during a Jan. 24 speech in Davos.

Tombini said today he is “not optimistic” about the economic situation, as the world passes through a transition period. Even though Brazil is using part of its buffers to smooth this process, the real might endure losses, he said. The currency has weakened 15.8 percent over the past 12 months.

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