Bloomberg News

Tombini Says Brazil Watching Inflation Closely to Take Next Step

April 02, 2013

Brazil’s central bank is closely watching inflation, which is proving persistent and pushing up costs across the board, to decide its next policy step, central bank president Alexandre Tombini said.

Prices increase in the service industry have accelerated, food costs continue to pressure inflation and the outlook has risks, Tombini told senators at a hearing today in Brasilia.

“It’s an inflation scenario that the central bank is certainly watching with care,” Tombini said. “Inflation is under control, but encloses risks ahead.”

The central bank has kept the benchmark interest rate at a record low since reducing it to 7.25 percent in October in a bid to revive economic growth even as inflation accelerates. Traders are betting policy makers will need to reverse at least part of the interest-rate cuts that marked President Dilma Rousseff’s administration after inflation approached the 6.5 percent upper limit of the target range.

Still, traders are wagering policy makers will wait until May to start raising rates given signs the economy is still recovering at a slow pace.

Industrial production contracted in February by the most since December 2008, the statistics agency said today. The 2.5 percent drop in output prompted traders to reduce bets that the central bank would raise rates this month to tame inflation.

Emphasizing Concern

The central bank’s monetary policy started changing in January when policymakers began emphasizing their concern over growing inflationary pressure, Tombini said.

Swap rates on the contract due in January 2014, the most traded in Sao Paulo today, fell 3 basis point to 7.75 percent at 11:31 a.m. local time. The real strengthened 0.15 percent to 2.0177 per U.S. dollar.

Annual inflation in Latin America’s largest economy jumped to 6.31 percent in February from 6.15 percent the month prior. Inflation is more widespread and resistant due to seasonal and transportation price increases, the bank’s director for economic policy, Carlos Hamilton, said on March 28.

Inflation will breach the 6.5 percent upper limit of the government’s target in June, before slowing, according to estimates by the central bank. It targets inflation of 4.5 percent, plus or minus two percentage points.

Brazil’s economy will grow at least 3 percent this year, Finance Minister Guido Mantega said last month. The country’s gross domestic product expanded by 0.9 percent and 2.7 percent in 2012 and 2011, respectively.

To contact the reporters on this story: Matthew Malinowski in Brasilia at mmalinowski@bloomberg.net; Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net.

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net.


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