Tombini Says Brazil Has Had Success in Effort to Slow Inflation

Brazil’s interest rate increases that pushed borrowing costs to the highest in two years have succeeded in slowing inflation, central bank President Alexandre Tombini said today. Swap rates fell.

Tombini said the full impact of the 3.25 percentage point increase to the benchmark Selic rate hasn’t fully materialized yet. The central bank will continue to keep a close eye on inflation and make sure it slows in 2014 and beyond, he said.

“Monetary policy operates with a lag. There is still impact of what we have done so far on inflation going forward,” Tombini said today about boosting the benchmark Selic rate. “We are doing our homework, fighting inflation. To a large extent, we have been successful.”

Traders reinforced bets the central bank will slow the pace of interest rate increases next week after Tombini’s comments. Swap rates on the contract due January 2015, the most traded in Sao Paulo today, reversed an earlier increase and fell 0.07 percentage point to 11.15 percent at 1:19 p.m. local time.

“Within the market, the impression that the Selic has already been raised enough and that the inflation outlook is already showing convergence prevailed,” Juliano Ferreira, strategy analyst at ICAP do Brasil Ctvm, said in a note.

Brazil’s central bank has lifted the benchmark Selic interest rate by 0.5 percentage point in each of the last six monetary policy meetings following a quarter-point increase in April. Rates have been lifted to 10.5 percent from 7.25 percent in March.

Slower Inflation

Monthly consumer price increases in January decelerated to 0.55 percent from 0.92 percent in December, the national statistics agency said on Feb. 7. Annual inflation slowed to 5.59 percent from 5.91 percent the month prior and a 2013 high of 6.7 percent in June.

“The IPCA, which is our official measure of inflation, can and will converge toward target in the coming quarters,” Tombini said.

While price increases have eased, inflation has exceeded the official 4.5 percent target for Tombini’s entire tenure. Brazil has the fastest inflation among major Latin American nations after Venezuela and Argentina, according to data compiled by Bloomberg.

Brazil’s economic activity shrank more than analysts expected in December, the central bank said on Feb. 14. The drop followed contractions in industrial production and retail sales, which declined by 3.5 percent and 0.2 percent in December, respectively.

Analysts surveyed weekly by Brazil’s central bank lowered their 2014 growth forecast to 1.79 percent, down from last February’s estimates of 3.8 percent growth for this year.

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