Brazil Balks at Tougher Inflation Target in Bid to Spare GDP

  • Policy makers kept inflation target unchanged at 4.5% in 2018
  • Decision follows speculation they would shoot for 4%

Brazil refrained from setting a more ambitious inflation target for 2018, as the government seeks to avoid aggressive monetary policy that could hamstring an economic recovery.

The National Monetary Committee, which includes central bank chief Ilan Goldfajn and Finance Minister Henrique Meirelles, on Thursday kept its current inflation target of 4.5 percent in place for 2018, while reaffirming the same goal for 2017. It kept the plan to narrow the current range of tolerance of plus or minus 2 percentage points to 1.5 percentage points in 2017 and 2018.

Speculation that the government would set a more ambitious goal for 2018 had increased in recent days, as Goldfajn seeks to anchor inflation expectations and rebuild the central bank’s credibility. Yet Thursday’s decision indicates he may be more focused on ending the recession than some people had expected.

"You have an economic situation that is quite troubling," Jankiel Santos, chief economist at Haitong in Sao Paulo, said after the meeting of the Monetary Committee ended. "Odds are now higher that there will be a reduction in interest rates at the end of this year," he said, adding: "There should be a correction in the market tomorrow."

Swap rates on contracts expiring in January 2018 have increased 6 basis points this month to 12.88 percent, after Goldfajn pledged to bring inflation to 4.5 percent in 2017. Reaching that target, he said, will also depend on budget cuts that have yet to be approved by Congress and implemented by Meirelles. Goldfajn will preside over his first rate decision in July.

The government has exerted some pressure on policy makers to consider monetary easing. Acting President Michel Temer told journalists last week he hopes borrowing costs will fall this year, as his administration struggles to revive investor and consumer confidence. The central bank has operational autonomy, though its leader can be fired by the president.

Temer dismissed the previous central bank chief, Alexandre Tombini, shortly after assuming the presidency in May. Tombini failed to hit the inflation target during his five years in office, and last year saw consumer prices rise at the fastest pace in more than a decade.

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