MercoPress. South Atlantic News Agency

Mantega anticipates higher interest rate to help keep inflation under control

“The interest rate isn’t fixed”, said Minister Mantega

Brazil’s Finance minister Guido Mantega in Moscow for the G-20 meeting, said that inflation above the government's target raises a yellow flag and that monetary policy, not the exchange rate, is the right tool to control prices.

“The interest rate isn’t fixed. If you have more worrying inflation, it can move, but this is up to the central bank to decide,” Mantega said in an interview from Moscow. “The government will do what it takes to keep inflation under control.”

Inflation which has exceeded the 4.5% target in the past 29 months, quickened to 6.15% in January.

Mantega said the government won’t allow the currency to over-appreciate in a bid to rein in consumer prices after the currency strengthened to a nine-month high last week. A stronger currency helps tame inflation by making imports cheaper.

Traders see a 50% chance of policy makers raising the Selic rate to 7.5% from 7.25% in April, Diego Donadio, Latin America strategist at Banco BNP Paribas Brasil SA, said in a telephone interview.

Brazil’s real appreciated 0.4% to 1.9582 per dollar last week, the strongest level since May 10, on speculation the government would allow the currency to appreciate to contain inflation. A drop in U.S. jobless claims also fostered demand for emerging-market assets.

“We will not allow for an over-appreciation of the Real,” Mantega said, adding that the government isn’t thinking of a specific level. “We won’t tolerate abnormal fluctuations”.

Speculation that Brazil was changing policy and seeking a stronger currency to help tame inflation started last month after the central bank surprised the markets with an intervention in swaps to prop up the Real.

The Real rallied to a level stronger than 2 per dollar on Jan. 28 for the first time since July after the central bank renewed 1.85 billion dollars of currency swaps about to expire, refraining from buying dollars to settle the contracts. On Jan. 31, the government exempted foreigners from a tax on real-estate funds traded on the stock exchange, spurring speculation that inflows will help sustain the real.

The Brazilian central bank swung in 2012 between selling currency swaps to prevent the Real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the Real from strengthening beyond 2 per U.S. dollar.

The central bank Monetary Policy Committee, Copom next meeting is scheduled for March 5/6.