MercoPress. South Atlantic News Agency

Brazil’s Tombini anticipates tougher global slowdown than in 2008/09

“We’re not betting on a catastrophe”, says the Brazilian Central bank president

Brazilian Central bank President Alexandre Tombini said in an interview with the local Valor Economico newspaper that Europe's expected difficulty in implementing a rescue package and slowing global growth are likely to justify the bank's recent surprise cut to interest rates.

Brazilian inflation will likely ease 2 percentage points by May of next year as Brazilian economic growth continues to slow and commodity prices stabilize, Tombini said.

Morgan Stanley on Monday slashed its forecast for Brazil's key interest rate for the second time in less than a month, predicting the baseline Selic rate will end 2012 at 10.5%, down from the current 12%.

According to Valor, Tombini said the effect of the global slowdown on Brazil will be “one-fourth” as strong as during the 2008-2009 crisis, meaning Brazil's GDP growth will likely be curbed by 1.25%.

“We don't expect commodity prices to pull inflation like in 2010 and Brazil's economy is already de-accelerating,” he said.

He also said that the base of comparison is high from the October-to-April period of the previous year, which means inflation will slow going forward.

The central bank president told Valor that Brazil doesn't work with the scenario of a Greek default, but added that though European governments are showing a willingness to resolve debt problems, “implementation is everything.”

“We're not betting on a catastrophe,” he said, according to Valor. “We're betting on a slowdown in global growth and a longer crisis than in 2008.”

Tombini also denied interference from Brazilian President Dilma Rousseff's government in deciding on the rate cut. Criticized as expanding the bank's purview from just inflation control to controlling growth and exchange rates as well, Tombini reiterated that the bank's only target is inflation.

However, he said that moderating currency inflows benefits the Brazilian economy because it can prevent shocks that would stress the market, citing the strong devaluation of Brazil's Real following the previous crisis, Valor reported.

Tombini also said that government efforts to reduce spending will help stabilize the economy. The additional BRL10 billion in reduced spending announced shortly before the rate cut “helps our work” at the central bank, Tombini said.

“There's the clear perception that the 2008 crisis had its origin in the deterioration of the fiscal situation of these countries,” he told Valor. ”So if the crisis worsens, we won't use the fiscal lever”.