MercoPress. South Atlantic News Agency

Brazilian government trying to calm inflation fears; warns of ‘prolonged effort’

Rousseff, Tombini and Mantega addressed the issue

Brazil’s central bank President Alexandre Tombini admitted that slowing inflation back to target next year will require a “prolonged” and incisive effort.

“The issue of bringing inflation back to the target will require a prolonged effort by the government, by the central bank certainly,” Tombini said at an event in Brasilia Tuesday. “This has been determined and will be pursued in a consistent and incisive way.”

Brazilian policy makers in a less than unanimous vote last week slowed the pace of rate increases, after raising borrowing costs a full percentage point at their past two meetings. President Dilma Rousseff’s government is relying on a mix of higher borrowing costs, steps to curb credit and currency inflows and spending cuts in a bid to bring inflation from the fastest pace in 29 months back to target in 2012.

Speaking at the same event in Brasilia, Rousseff said her administration was ready to take the necessary measures to tame inflation, and Finance Minister Guido Mantega anticipated the government had to use “all weapons” to rein in consumer prices.

Policy makers raised the overnight rate to 12% from 11.75% April 20.

Brazil targets annual inflation of 4.5%, plus or minus two percentage points. Inflation will surpass the upper limit of the target between July and August, as the central bank uses the range to accommodate price shocks, Carlos Hamilton, the bank’s director of economic policy, said last month.

Consumer prices as measured by the IPCA-15 index rose 6.44% in the year through mid-April, the national statistics agency said last week.

Tombini said the central bank faces a dual challenge of reining in consumer prices while dealing with “intensive foreign capital inflows,” which help fuel inflation. He also said that broad international liquidity adds to inflationary pressures in Brazil.

“Unfortunately, the inflationary impact of the capital inflows can’t be dealt through interest rates,” Tombini said.

Brazil has chosen so-called macro-prudential measures, such as higher taxes on foreign loans and bond sales abroad, as the adequate tools to deal with foreign capital inflows, Tombini said in the speech.
Consumer prices in Brazil are being fuelled by a jump in commodity prices and by domestic factors as well, Tombini said. Services inflation has remained high, reflecting a heated economy, he added.

Meanwhile the federal government announced Tuesday a wider-than- expected surplus before interest payment in March. The primary surplus widened to 9.1 billion Real ($5.8 billion USD).