Tags: Brazil Talks Tough on Inflation but Economy Still Hot

Brazil Talks Tough on Inflation but Economy Still Hot

Thursday, 27 Jan 2011 02:54 PM

Brazil's central bank laid down a tough line against inflation Thursday, saying the government must also act to control its budget as record-low unemployment underscores the risk of inflation in Latin America's biggest economy.

In minutes released from its monetary policy meeting last week, the central bank said a tight labor market and robust domestic demand would keep pressure on consumer prices, requiring broad government action to cool inflation that is at a six-year high.

The bank, which a week ago raised interest rates for the first time in six months, stressed that monetary policy alone is not enough to rein in inflation. It highlighted the need for fiscal restraint — a reference to a pledge by President Dilma Rousseff to cut public spending.

Rousseff, at a news conference in Rio de Janeiro, reiterated the government's commitment to hold back price pressures.

"We're going to keep control of inflation," she said. "We're not going to play around with inflation and we'll keep the economy growing systematically."

The central bank, in the minutes, said its inflation outlook "takes into account the realization of fiscal targets that the bank is working with."

Public spending spiked in Brazil last year ahead of October presidential elections as the government opened the coffers to boost the ruling party's candidate, Rousseff. The new president is expected to announce a freeze in government expenses next month as she seeks to show investors she is serious about trimming spending.

Still, inflation has sped up enough that the central bank is likely to have to raise rates further despite budget cuts — a move that would carry the risk of spurring further gains in Brazil's currency and stoking inflation even more. Other big emerging economies face the same challenge as they tighten interest rates to control inflation.

Sovereign debt has been a global concern in recent months. Standard & Poor's cut Japan's credit rating Thursday for the first time since 2002, and a fiscal crisis in Europe remains unresolved.

Nor are developed nations the only ones at risk, the International Monetary Fund warned Thursday.

The IMF said that fiscal balances in Brazil, China and India were weaker than it projected in November, calling the deterioration in Brazil's fiscal accounts "particularly pronounced."

 

Neil Shearing, senior emerging markets economist at Capital Economics Ltd in London said the central bank's minutes "are unequivocally hawkish."

"If there were any lingering doubts as to whether or not (the central bank) would shift priorities under the new governor, Alexandre Tombini, I think they've been well and truly banished now," Shearing said.

Tombini, who took the helm of the central bank at the start of the month, has been under pressure to prove his inflation-fighting credentials to markets as prices advance.

Last week, the central bank raised its benchmark Selic rate to 11.25 percent from 10.75 percent and said the move started "a process of adjustment of the benchmark interest rate."

Brazil's economy likely grew in 2010 at its fastest pace in more than two decades, fueled by a credit boom, record-low unemployment and higher wages. The jobless rate closed out the year at an all-time low, falling to 5.3 percent, the government reported Thursday.

The rate is about one-quarter the jobless rate in Spain, which stood at 19.8 percent in the third quarter, and far lower than the 9.4 percent unemployment in the United States in December.

But Brazil's brisk growth has come at a cost: speeding inflation and a rapidly strengthening currency, which is hurting exporters by making their goods more expensive abroad.

Inflation in Brazil surged in 2010 on the economic boom, finishing the year at 5.91 percent — the highest level since 2004 and above the center of the bank's target of 4.5 percent, plus or minus 2 percentage points.

The central bank said the outlook for inflation has only risen since its last policy meeting in early December. Market participants have raised their inflation forecasts for seven straight weeks, and data released Wednesday showed 12-month inflation surpassing 6 percent.

While higher interest rates will help contain inflation, they could also fuel further increases of the Brazilian real as foreign investors flee near-zero interest rates in more developed economies. Those worries have prompted cries of a "global currency war" in several developing economies.

The central bank has also taken other steps to curb the currency. It raised the percentage it makes banks hold from deposits and announced it could start holding auctions to buy currency forwards.

"It's a trade-off: You either accept a higher-value currency or accept implicitly some inflation," Shearing added.

© 2017 Thomson/Reuters. All rights reserved.

   
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Brazil's central bank laid down a tough line against inflation Thursday, saying the government must also act to control its budget as record-low unemployment underscores the risk of inflation in Latin America's biggest economy. In minutes released from its monetary policy...
Brazil Talks Tough on Inflation but Economy Still Hot
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2011-54-27
Thursday, 27 Jan 2011 02:54 PM
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