MercoPress. South Atlantic News Agency

Brazil will cut the benchmark interest rate “to less than 10%” this year

Central bank president Alexandre Tombini

Brazilian central bank survey showing interest rate levels are inconsistent with the country’s inflation target won’t alter policy makers’ strategy of lowering borrowing costs further, bank President Alexandre Tombini said.

The so-called “neutral” rate of interest needed to keep inflation on target with the economy growing at a sustainable pace is 5.5%, according to the median estimate in the survey of economists published Feb. 23. That is higher than the current inflation-adjusted interest rate of 4.3%.

“I think it will have little impact on the monetary authority’s strategy,” Tombini said, referring to the survey’s results. He spoke to reporters in Mexico City, where he was attending a meeting of finance officials from the Group of 20 richest nations.

Tombini reiterated that there is a high chance the central bank will cut the benchmark interest rate to less than 10% this year, from the current 10.5%. The bank’s monetary policy committee next meets March 6-7.

“This strategy hasn’t changed until now,” he said.

Since August, the policy makers have cut the Selic rate four times, reduced taxes and pledged to boost public investments to ensure growth of 4.5% this year. The stimulus has raised concerns among economists that Tombini may fail to fulfill his pledge to slow inflation to the bank’s 4.5% target this year. Consumer prices rose 6.22 in January from a year ago.

The real neutral interest rate was 6.75% in November 2010, according to the median forecast in a previous central bank survey. Brazil has the highest real interest rate in the Group of 20 Nations.

Tombini said that perhaps more important than the decline in the neutral rate since the bank’s last survey is the fact that most analysts expect it to fall even further in the next two years.

“This process hasn’t ended according to the people we consulted,” he said, adding that the analysts’ perception is consistent with the bank’s current rate-cutting strategy.