Brazil to press ahead with rate cuts to boost growth, says central bank chief
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Emerging Markets

Brazil to press ahead with rate cuts to boost growth, says central bank chief

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Brazil’s central bank chief Alexandre Tombini tells Emerging Markets why monetary easing is set to continue

The Brazilian central bank will press ahead with its crusade to slash interest rates in spite of signs that economic activity is picking up at home, its president has said.

In an exclusive interview with Emerging Markets, central bank chief Alexandre Tombini said the prolonged global economic slowdown had led it to loosen monetary policy. “A slow economy opens up space for adjusting policies,” he said.

The central bank sped up the pace of its interest cuts this year, with a 75 basis point reduction to 9.75% earlier this month and more to come in the coming weeks, according to the minutes of the latest meeting of the monetary policy committee (Copom).

“Part of the story we’ve seen so far since late August has to do with the slowdown in the global economy. The slowdown with the many channels of transmission on emerging markets has no doubt reduced inflationary pressures,” Tombini said.

The minutes said: “The Copom attributes high probability to a scenario that contemplates the Selic rate moving to levels slightly above historical lows, and stabilizing at those levels.”

There are indications though that the bank may consider pushing interest rates lower than the trough of 8.75% they reached in July 2009.

“If the Copom comes to see downside risks to growth, the alternative scenario would be an even lower Selic rate, possibly at 8.5%,” said Ilan Goldfajn, chief economist at Itaú Unibanco, who noted that “further pressure for currency appreciation may also lead to more cuts in the interest rates”.

A looser monetary policy would help to serve several purposes being pursued by the Brazilian government. It would spur domestic economic growth, while also reduces interest rate differentials with the rest of the world that it turn would limit capital inflows and alleviate upward pressure on the exchange rate.

Recent rate cuts combined with tax measures have already helped the real to decline to 1.80 to the dollar, from 1.60 a few weeks ago. President Dilma Rousseff has repeatedly said Brazilian interest rates should “converge” towards international level. This is a shift for orthodox monetary policy under Henrique Meirelles, Tombini’s predecessor, who cited the inflation target at the central bank’s sole objective.

Nevertheless, Tombini denied he had given up on inflation target, which is currently 4.5% with a 2 percentage point tolerance margin, saying he is only “adjusting policy instruments”.

“We have been living through a disinflation period since the third quarter of 2011. I just want to stick to the facts. The change in the monetary policy stance coincided with a disinflation period that started in the third quarter, which continues as we speak,” he said.

Some market analysts believe inflation may peak up again next year. “Inflation expectations for 2013 has been jumping, creeping up steadily. We are waiting to see how steep the yield curve will get,” said Alexander Gorra, senior strategist at BNY Mellon in Sao Paulo. “A lot of these institutional investors have predictions of 6% plus inflation.”

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