Henrique Meirelles, president of the Brazilian Central bank, this weekend emphatically ruled out any change in the floating exchange rate regime to reverse the appreciation of the Brazilian currency.
“The Brazilian economy works well with a combination of a floating exchange rate and foreign reserves,” he told reporters in Miami yesterday.
His comments came after Brazilian policy advisers suggested that the government should intervene more directly to forestall the impact of a possible collapse of the dollar, and the detrimental impact on the manufacturing industry and its export performance.
“The inflation targeting regime has been working exceptionally well in Brazil,” Meirelles said. “A regime of exchange rate targeting is incompatible with a regime of inflation targets. Countries which have tried to implement an exchange rate targeting regime in disguise ended up with serious inflationary problems.”
Meirelles played down any major policy rift with Brazilian finance minister Guido Mantega. “What is important is that Mantega said in a recent interview that Brazil has an inflation targeting regime, it is committed to it, and it will not adopt a system that jeopardizes its inflation targets,” Meirelles said.
“This regime inclu-des a privileged kind of [monetary policy] instrument, which is the base interest rate. ... Increasing or cutting interest rates is something that is part of the routine of central banks all other the world. The important thing is to have inflation on target and economic growth,” he said.
Meirelles has refused to comment on the next central bank move – which could be made on April 16, when the monetary policy council next meets. But the minutes of the last meeting make clear that the option to hike interest rates again for the first time in more than two years is seriously being considered.
A Brazilian banker said: “Demand is growing too fast, and interest rate hikes is the most modern instrument to control it.” These trends have sent shivers down the spines of some economic ministry officials.
Mantega is now suggesting tightening fiscal policy by means of budget cuts – running to some $10 billion in 2008 – in order to prevent another round of interest rate hikes. Last month, he introduced a 1.5% tax on foreign investment in debt securities only a few days after denying the introduction of capital control.
A Brazilian banking official said: “Some in the left-wing camp like this a lot. ... but Lula is not going to give in to that kind of pressure.
“The central bank has been winning all the battles and will continue to do so. The central bank is a safe haven.”
But another Brazilian minister said: “You have to be crazy to think that Lula is going to change economic policy in its sixth year in power.”