Bloomberg News

Credit Curbs Beat Rate Increases to Contain Brazil Inflation

March 29, 2012

Containing credit growth is a more effective tool for fighting inflation than raising the benchmark interest rate, said Trade Minister Fernando Pimentel, a top aide to President Dilma Rousseff.

“At least in recent years, I’d say the variable interest rate hasn’t been that significant for containing price increases,” Pimentel said in an interview in New Delhi. “The central bank showed recently that so-called prudential measures, basically reducing the space for credit, have a bigger impact than simply moving interest rates. Increasing rates is part of the arsenal of the past.”

Traders are wagering policy makers, after reducing the benchmark rate to a near-record low 9 percent in May, will have to reverse course and increase borrowing costs early next year to rein in inflation that was the fastest since 2004 last year. Central bank estimates show inflation will exceed the government’s 4.5 percent target in 2013 even if policy makers push the benchmark rate to 10 percent next year.

Pimentel, who is in India with Rousseff attending a summit of leaders from Russia, India, China and South Africa -- the so- called BRICS group of major emerging markets -- said it was up to the central bank to set rates according to its own independent criteria.

“I am just an observer,” said Pimentel, a former mayor of Belo Horizonte who like Rousseff was a member of the Marxist underground that fought against Brazil’s 1964-1985 military dictatorship.

Less Inflation Risk

Still, he said inflation concerns have receded, and policy makers can lower interest rates further because they have other tools to keep prices in check.

“The inflation risk isn’t as immediate as it used to be,” he said.

The yield on interest rate future contracts maturing in January 2014, the most traded in Sao Paulo, rose 3 basis points, or 0.03 percentage point, to 9.53 percent at 5:28 p.m. local time.

To contain credit growth that peaked at over 20 percent in 2010, the central bank that year raised reserve and capital requirements for local banks, removing at least 61 billion reais ($33 billion) from circulation.

Analysts estimated the credit measures were equivalent to lifting the benchmark rate by 0.75 percentage point, according to the median estimate in a central bank survey published in February 2011.

Some of those credit curbs have since been phased out to stimulate growth that last year was 2.7 percent, less than Germany and trailing other major emerging markets like China and India. The pace of bank lending has since slowed, to 17 percent in February 2012.

Inflation Outlook

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.

Policy makers, in their 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.

They 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.

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.

An exchange rate of 1.5 reais per U.S. dollar would be “fatal” for Brazilian industry, while 2 reais per dollar would be “very good” Pimentel said.

The real rose 0.2 percent to 1.8230 per U.S. dollar. The currency has fallen 5.8 percent against the dollar this month, the most among 16 major currencies tracked by Bloomberg.

To contact the reporter on this story: Arnaldo Galvao in Brasilia Newsroom at

To contact the editor responsible for this story: Joshua Goodman at

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