Bloomberg News

Brazil Inflation Drop Shows Rate Cuts Are Right, Templeton Says

February 22, 2012

Feb. 22 (Bloomberg) -- Brazil’s falling inflation and slower economic activity since the start of the year show the central bank is correct in its policy of lowering the benchmark Selic interest rate, said Carlos Thadeu de Freitas Gomes Filho, senior economist at Franklin Templeton Investimentos Brasil.

“After consecutive interest-rate cuts, inflation is falling, economic activity is falling,” Gomes Filho said in a telephone interview from São Paulo. “This shows the central bank has the correct strategy.”

Brazil’s central bank signaled that the Selic may reach a single digit this year, compared with 10.5 percent currently, according to the minutes of its last monetary policy meeting published Jan. 26. Lower rates wouldn’t prevent inflation from converging towards the center of its target of 4.5 percent in 2012, Central Bank Director Luiz Awazu Pereira da Silva said Feb. 4.

The Monetary Policy Committee has lowered the benchmark rate by 2 percentage points since August, after policy makers began a cycle of cuts to help shield Brazil from the effects of the European debt crisis. Brazil’s consumer prices rose less than expected through mid-February, with inflation of 0.53 percent, compared with 0.65 percent a month ago, according to data released Feb. 17. Annual inflation slowed to below 6 percent for the first time since December 2010.

The Selic may fall to as low as 9 percent this year as a result of lower inflation and expected economic growth of about 3 percent, according to Gomes Filho. Food prices will help bring inflation to 0.33 percent at the end of February, he said. He forecasts inflation of 5 percent for 2012.

“The central bank is more comfortable to continue cutting rates,” he said. “A reduction to as low as 9 percent is reasonable, but it could fall further if the situation outside Brazil deteriorates.”

--Editors: Fabiola Moura, Karen Eeuwens

To contact the reporter on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net

To contact the editor responsible for this story: Helder Marinho at hmarinho@bloomberg.net


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