MercoPress. South Atlantic News Agency

Brazil confident it can control inflation in second half and moderate capital inflow

“The central bank is comfortable” said Tombini

The Brazilian central bank is comfortable with its inflation forecast for 2011 despite a stronger-than-expected June reading, which spurred speculation that even higher interest rates will be necessary to keep prices in check.

Speaking to investors in New York, Central Bank President Alexandre Tombini said he was not surprised by June's consumer inflation of 0.15%.

“In fact the central bank's implicit forecast for last month's IPCA price index was for a 0.12% rise”, said Tombini who added that the current numbers allow Brazil to close the year with an annual inflation rate of “slightly under 6%” within the government target of 2.5% to 6.5%.

“The central bank is comfortable with the inflation outcome we had in June,” Tombini insisted in an event organized by the Brazilian American Chamber of Commerce. He reminded investors that monetary and fiscal policies “operate with lags.”

“We'll feel the full force of these instruments come to play later this quarter and in the fourth quarter of this year”

Brazil's central bank has raised rates four times so far this year -- by a cumulative 150 basis points to 12.25%. At the same time, Brazilian government has promised to freeze 50 billion Real from this year's budget to help fight inflation.

Tombini said the government has been able to moderate capital inflows to Brazil and curb credit excesses with a series of macro-prudential measures designed to curb personal credit or to reduce risk taking by financial institutions.

He said the measures are intended at containing “potential risks to financial stability in the future” rather than remedy the situation.

Despite those measures, he said, Brazil will remain a friendly destination to international capital markets because the central bank sees them as “part of the solution” for the country's infrastructure deficit.