Tombini Says Brazil Inflation to Slow to Target on Current Rates

Brazil’s inflation will slow toward the 4.5 percent government target if current interest rates are maintained, Central Bank President Alexandre Tombini said today.

“Maintaining monetary conditions, that is, taking into account a strategy that doesn’t contemplate a reduction of the monetary policy tool, inflation should enter a trajectory of convergence toward the target in the final semesters of the outlook horizon,” Tombini said at a Senate hearing.

Inflation is under control and will end this year within the target range of 2.5 percent to 6.5 percent as the economy slows from last year and the effects of recent monetary tightening have not been fully felt yet, Tombini said.

President Dilma Rousseff’s administration is seeking to balance policies aimed at reversing an economic slowdown while taming above-target inflation. The central bank kept the key rate at the highest level since 2012 for the past two meetings after raising it by 375 basis points through April.

Swap rates on the contract due in January 2016, the most traded in Sao Paulo today, rose 13 basis points, or 0.13 percentage point, to 11.44 percent at 11:07 local time. The real weakened by 0.8 percent to 2.2768 per U.S. dollar.

The central bank on July 16 kept the benchmark Selic unchanged at 11 percent. In the minutes to the meeting, policy makers said their strategy does not contemplate “a reduction in the monetary policy tool.”

Upper Limit

A higher key rate has not prevented annual inflation from surging beyond the 6.5 percent upper limit of the central bank’s target range. Consumer prices in the year through mid-July reached 6.51 percent and are expected to increase to 6.6 percent by September, according to the central bank’s own estimates.

Brazil’s central bank should consider unwinding measures that reduced credit in 2010 and 2011 in efforts to offset slower growth, a government official with knowledge of monetary policy said on Aug. 1. Efforts to control inflation by keeping the key rate at a higher level aren’t at odds with macro-prudential measures aimed at increasing liquidity to temper excessive pessimism, the government official said.

Those comments came after the central bank on July 25 injected 45 billion reais ($20 billion) into the banking system by lowering reserve and capital requirements. The changes will better distribute liquidity in the economy, according to a central bank statement.

Growth Estimate

Economists in a weekly central bank survey cut their 2014 growth estimate for the 10th straight week, to 0.86 percent, according to the survey published yesterday. That’s roughly half the central bank’s 2014 growth forecast of 1.6 percent.

Retail sales in May unexpectedly rose for the first time since January. Industrial output in June dropped for the fourth straight month on declines from capital goods to consumer durable products.

Weaker output has coincided with lower industrial confidence, which has fallen in all but one month this year and in July reached its lowest level on record, according to the National Industry Confederation. Consumer sentiment as measured by the Getulio Vargas Foundation is near a five-year low.

CSN is one of the companies that has seen its results deteriorate. The steelmaker said yesterday that its second quarter profits dropped 96 percent on weaker sales, as demand was affected by the World Cup and holidays.

Latin America’s largest economy expanded by 0.2 percent during the first three months of this year, as the biggest drop in investments in two years offset gains in agriculture. The economy grew by 2.5 percent in 2013.

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