Brazil says high­est key rate in nine years will tame in­fla­tion

The Pak Banker - - BUSINESS -

BRASÍLIA: Brazil's cen­tral bank says keep­ing in­ter­est rates at the high­est level in nine years for a pro­longed pe­riod will bring in­fla­tion back to its tar­get by the end of 2016. The cen­tral bank board, led by bank Pres­i­dent Alexan­dre Tom­bini, voted last week to lift the bench­mark in­ter­est rate for the sev­enth straight meet­ing, by 50 ba­sis points to 14.25 per­cent. For­eign af­fairs di­rec­tor Tony Volpon ab­stained from vot­ing af­ter public com­ments made by him were seen by law­mak­ers as im­prop­erly pre­view­ing his vote.

The cen­tral bank "con­sid­ers that the sce­nario for in­fla­tion to con­verge to­ward 4.5 per­cent at the end of 2016 has strength­ened," pol­icy mak­ers said Thurs­day in the min­utes to their July 28-29 meet­ing. "The com­mit­tee con­sid­ers that hold­ing that in­ter­est rate level for a suf­fi­ciently pro­longed pe­riod is nec­es­sary for the con­ver­gence of in­fla­tion to­ward the tar­get at the end of 2016." Brazil faces the dou­ble threat of an in­fla­tion rate that is twice the gov­ern­ment tar­get and the prospect of the worst re­ces­sion in 25 years. Pol­icy mak­ers have in­creased the key rate by 325 ba­sis points since Oc­to­ber to fight ris­ing prices. Slow­ing growth has crip­pled rev­enue to the point that Fi­nance Min­is­ter Joaquim Levy had to cut the gov­ern­ment's fis­cal tar­get even as Brazil faces the risk of a credit down­grade to junk.

An­nual in­fla­tion in mid-July ac­cel­er­ated to 9.25 per­cent, the fastest pace in more than a decade and more than dou­ble the cen­tral bank's tar­get range of 4.5. Monthly in­fla­tion was 0.59 per­cent, be­low an­a­lysts' me­dian es­ti­mate. Stan­dard & Poor's last month re­vised the out­look for Brazil's sov­er­eign credit rat­ing down to neg­a­tive, cit­ing the eco­nomic slow­down. Brazil sits one level above junk and a down­grade would mean los­ing in­vest­ment-grade sta­tus. Latin Amer­ica's largest econ­omy will con­tract 1.8 per­cent this year, ac­cord­ing to a cen­tral bank sur­vey of econ­o­mists pub­lished Aug. 3. Growth is ex­pected to re­bound to 0.2 per­cent next year. The slow­down has eroded tax col­lec­tion, ac­cord­ing to Levy, prompt­ing the eco­nomic team on July 22 to cut the pri­mary bud­get sur­plus tar­get for the year to 0.15 per­cent of GDP from 1.1 per­cent. The gov­ern­ment is still push­ing Congress to ap­prove the latest aus­ter­ity mea­sures. Levy said Wed­nes­day that the gov­ern­ment needs to fin­ish the ad­just­ment be­fore pur­su­ing growth.

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