Brazil will miss its inflation target next year even if policy makers resume interest rate increases after cutting borrowing costs to a near record low, according to central bank estimates.
The bank, in its quarterly inflation report today, said inflation will slow to the 4.5 percent target by year-end, and then rebound to 5.3 percent in 2013, should policy makers fulfill economists’ forecast for them to cut the benchmark rate to 9 percent this year and raise it to 10 percent in 2013.
Policy makers reiterated today they see a “high probability” of reducing the Selic (BZSTSETA) rate to slightly above the record low of 8.75 percent to protect Latin America’s biggest economy from slower growth in advanced economies. The government is relying on a mix of tax cuts and lower interest rates to fuel growth of 4.5 percent this year after the economy expanded 2.7 percent in 2011.
“If it was me, I wouldn’t cut rates further,” Luciano Rostagno, chief strategist at Banco WestLB do Brasil, said in a phone interview from Sao Paulo. “But the central bank will continue to cut. It has a short term view. It wants to stimulate the economy this year.”
The central bank said today it expects the gross domestic product to expand 3.5 percent in 2012.
The yield on interest rate future contracts rose today after the report. The yield on the January 2014 contract, the most traded in Sao Paulo, gained two basis points to 9.52 percent at 2:24 p.m. local time.
Since August, Brazil has cut the benchmark interest rate by 2.75 percentage points to 9.75 percent, more than any other member of the Group of 20 most industrialized nations. At the same time, the government this month extended tax cuts announced in December to boost sales of home appliances and other labor- intensive products.
“The focus of monetary policy was, is and will continue to be inflation,” central bank’s economic policy director Carlos Hamilton said.
More efforts to stimulate investment will be announced next week, President Dilma Rousseff said today in New Delhi, where she is attending a summit of leaders from Russia, India, China and South Africa, the so-called BRICS.
Should the central bank keep the benchmark interest rate unchanged, consumer prices will rise 4.4 percent this year and 5.2 percent in 2013, according to the bank’s inflation report. In the previous report in December, policy makers forecast prices this year would rise 4.7 percent.
Inflation in 2013 may be slower than the forecast published today given the favorable “balance of risks,” Hamilton said, when asked whether policy makers would have to raise interest rates next year.
“We still see important risks in the international scenario,” Hamilton told reporters in Brasilia today.
Consumer prices rose 0.25 percent in mid-March, less than all 42 analysts in a Bloomberg survey had predicted, taking the annual rate to 5.61 percent, the lowest since 2010. Consumer prices will rise 5.28 percent in 2012 and 5.5 percent next year, according to the median forecast in a March 23 central bank survey.
The real, which fell 0.3 percent to 1.8317 per U.S. dollar, was the biggest gainer of 16 most-traded currencies tracked by Bloomberg in the first two months of the year. This month, it declined more than all major currencies after the government raised taxes on foreign investment to help manufacturers being hurt by the currency gains.
Rousseff, in India, criticized today the response of the U.S. and Europe to the global financial crisis, saying monetary stimulus and budget cuts would not repair the world economy.
At the same time, monetary expansion in rich nations results in “artificial devaluations” that “introduce grave currency imbalances,” that hurt faster-growing emerging markets like Brazil, Rousseff said.
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