Brazil Central Bank Sees No Room to Cut Rates as Inflation High

Brazil’s central bank sees no room to cut interest rates as uncertainty over public spending and the global economy increases risks to still-high inflation.

The central bank board, led by its President Alexandre Tombini, kept the key rate unchanged at 14.25 percent last week for the sixth straight meeting, as forecast by all 50 analysts surveyed by Bloomberg. Unlike the previous three gatherings, when two policy makers voted for an increase, the decision to hold was unanimous.

"The central scenario does not allow working with the hypothesis of flexibilizing monetary conditions," according to the minutes of the April 26-27 meeting published Thursday morning. "

While still running at more than double the official target of 4.5 percent, inflation has started to slow in recent months amid the deepest recession in decades and a winding down of government-regulated price increases. Tombini has pledged in recent speeches to do what’s necessary to bring inflation to target by the end of next year.

Economists are skeptical he can succeed. Analysts surveyed by the central bank forecast inflation of 5.7 percent next year. Two-year break-even rates, based on the difference in nominal and inflation-linked bonds, persist above 6 percent.

It is uncertain how long Tombini will be in charge of the board, as an impeachment vote may force his boss, President Dilma Rousseff, from office as early as next week. Vice President Michel Temer would step in and is expected to replace her economic team.

Temer has pledged to put Brazil’s troubled economy "back on track." It will be no easy task, as gross domestic production is forecast to shrink for the second-straight year in 2016, unemployment is rising and consumer confidence is at a record low.

Brazilian assets have surged on expectations Temer could succeed. Sao Paulo’s Ibovespa is one of the best-performing indexes in the world this year, and the real has erased some of last year’s losses, appreciating 12 percent in 2016. That too is taking pressure of inflation, which fell to 9.4 percent in March, the lowest since June last year.

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