Brazil defends economic policy; IMF stresses basics

Brazil on Sunday defended its unorthodox strategies to cool its economy as the International Monetary Fund cautioned Latin America not to forget its basic tool for fighting inflation: the cost of money.

Central bankers mainly use interest rates to guide an economy.

But policymakers in Brazil, which has some of the highest interest rates in the world, have suggested they will increasingly use measures including curbs on bank lending to complement rates, reducing bets on the pace of hikes.

The deputy governor of Brazil’s central bank said huge inflows of hot money attracted to the country’s high interest rates were fueling a lending boom and inflation.

“We are facing now a great flood of international liquidity,” Deputy Central Bank Governor Luiz Pereira da Silva told a bankers’ forum in Canada.

“Too much of a good thing can be a problem.”

Brazil’s inflation rate topped 6 percent in February for the first time since November 2008. As well as alternative monetary policy measures, Brazil has erected several barriers to inflows of speculative capital.

The policies have been criticized by some economists and the International Monetary Fund has been lukewarm to them.

“The more unconventional measures can never be a substitute for the fundamental measures,” IMF Western Hemisphere director Nicolas Eyzaguirre told a news conference in Calgary, where financial officials from North and South America gathered for Inter-American Development Bank meetings.

Eyzaguirre said interest rates were below historical averages in much of Latin America where central banks slashed interest rates in 2009 to counter the global economic crisis.

Faced with rising inflation pressures, countries should start by reining in fiscal policy and monetary policy, the IMF official said. The head of the IMF on Saturday said many Latin American economies were overheating.

“You want to deleverage or exit from that stimulus stance,” Eyzaguirre said. He said if money inflows are a problem, other measures could also be used.

Brazil has raised borrowing costs sharply since 2009 but policymakers worry higher rates are attracting too much investment, pumping up credit markets and hurting exporters as the local currency strengthens. It has also asked banks to hold more money in reserve, but inflation continues to rise.

New President Dilma Rousseff has announced plans to cut $30 billion from the government’s budget although investors are still waiting for proof the cuts will take place.

But super-low U.S. interest rates are encouraging a huge and potentially destabilizing flow of cash into developing economies, and countries across Asia and Latin America have put up barriers to it.