MercoPress. South Atlantic News Agency

Brazil basic rate unchanged at record low 7.25%, but inflation could reverse policy

Former central bank chairman Meirelles believes inflation will hover from 5.5% to 6%

Brazil’s central bank on Wednesday kept its benchmark rate at a record low 7.25% for the third straight meeting as policy makers seek to prop the anaemic economy which last year only advanced 0.9%.

In a brief statement, the bank’s monetary committee said it decided to keep rates steady after “evaluating macroeconomic conditions and the outlook for inflation.”

“The committee will accompany the evolution of the macroeconomic environment until its next meeting, to then define the next step in its monetary policy strategy,” the statement concluded, eliminating a key phrase present in previous rate decision statements, which said that by keeping the Selic steady for a “sufficiently prolonged period” inflation would converge to the bank's target. The board said its vote was unanimous.

Officials, including Finance Minister Guido Mantega and Central Bank President Alexandre Tombini, have been laying the groundwork for a possible reversal in monetary policy in recent weeks, with statements denying the use of foreign-exchange policy to influence prices in the economy and reinforcing the central bank's role in curbing inflation.

Inflation is at a high level and requires attention, the central bank said in response to a report showing that consumer price increases in January exceeded economists’ expectations for the seventh straight month, jumping 0.86% and pushing the annual rate to 6.15%. The bank targets inflation of 4.5%, plus or minus two percentage points.

Finance Minister Guido Mantega said last month that policy makers stand ready to combat inflation, adding that raising interest rates is an option. After the Real fell 9% against the US dollar last year, policy makers have allowed the currency to strengthen 4.1% so far this year since a stronger currency can help restrain inflation by making imports cheaper.

Even as officials plan new tax cuts and reduce electricity costs to try and tame price pressures, economists including Henrique Meirelles, former central bank president and current senior adviser for KKR Co. LP, expect inflation to remain close to the upper limit of the target range. Inflation is a “challenge” and will hover from 5.5% to 6% in 2013, Meirelles told investors March 5 in Rio do Janeiro.

Government officials including Mantega travelled last week to New York and London to drum up 235 billion dollars in infrastructure investment. Rousseff, who has met one-on-one with eleven businessmen, from billionaire Eike Batista to Banco Santander SA Chairman Emilio Botín, is trying to reverse a slide in confidence that’s behind the world’s second-worst stock slump among major exchanges. The Bovespa index has fallen 4.9% this year.