Brazil's central bank said Thursday it remained cautious about the outlook for prices due to uncertainties in the global economy, and hinted that more than just interest rates may be needed to bring inflation back into line with targets.
Inflation is likely to continue rising above the government's goal until the third quarter, after which it would start to dip, the central bank acknowledged in the minutes of its March 2 interest rate meeting. But it said that there's a degree of uncertainty [about the outlook] which is above normal, particularly beyond Brazil.
With its circumspect approach, the central bank indicated it's happy with the current pace of rate hikes, which has seen the key Selic rate rise to 11.75% per year--the highest rate by far among the world's major economies--after two consecutive half-point rate hikes.
That could energize those who believe that the central bank's monetary policy committee, or Copom, needs to be more aggressive with interest rates to rein in the Brazilian economy, which is starting to slow after a robust recovery in early 2010, but which still remains fired up amid low unemployment and higher salaries.
The central bank hinted at an alternative, whereby the government could adopt other measures, as it did late last year when it moved to rein in bank lending, to cool the economy. These macro-prudential measures are a rapid and potent instrument to contain demand, and any new measures could open up some room to re-examine its interest rate policy, the central bank said.
The minutes of the last Copom meeting brought a more dovish tone than we and the markets were expecting, said economists at Barclays Capital. We interpret them as a strong indication that future monetary tightening will be less based on interest rate hikes and more dependent on macro-prudential measures.
Brazil's IPCA consumer price index reached 6.01% in February, well above the government's official year-end target of 4.5%, and closing in on 6.5%, which marks the upper end of the band set for the central bank. Prices are expected to stay above the center of the target this year and next.
According to recent central bank market surveys, the monetary authority is seen raising the Selic rate to 12.50% by the end of this year.
The central bank's next interest rate announcement is scheduled for April 20