Brazil resolute on rate rises to calm inflation

Brazil will increase interest rates as long as necessary to quell headline inflation, its central bank chief has said, but he added that there was already some light at the end of the tunnel, with monthly price increases expected to begin slowing in May.

People close to Alexandre Tombini, president of Banco Central do Brasil, also said that the government considered conventional monetary policy as the main tool to combat rising inflation and was not contemplating drastic capital controls.

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“This is not a 100-metre race, this is a long process,” Mr Tombini told Globo News, a Brazilian television station. “And the central bank will take this process forward as long as necessary to make inflation converge to the target of 4.5 per cent in 2012.”

Dilma Rousseff, Brazil’s president, and senior members of her economic team have unleashed a barrage of comments in recent weeks stressing their commitment to reining in inflation.

With consumer price rises expected to have exceeded the upper limit of the central bank’s target of 4.5 per cent plus or minus 2 percentage points in the 12 months to the end of April, there is concern over the government’s resolve.

The International Monetary Fund warned in a report released on Tuesday that many of the region’s economies were expanding beyond capacity, causing inflationary pressures.

“Overheating risks stand out in much of Latin America,” said the report.

Brazil’s central bank increased interest rates 25 basis points to 12 per cent two weeks ago in an intervention that was initially interpreted as dovish by markets.

But the central bank has since said it will “prolong” these rate rises until inflation looks like converging to the official target, probably some time next year.

Goldman Sachs said it expected that a strong economy this year will force the central bank to raise the benchmark Selic interest rate five more times to 13.25 per cent by the end of the year.

“We believe that the strong momentum in services activity and labour markets will boost growth to above trend in the first half of 2011,” the bank said in a note to clients, adding that it was forecasting economic growth this year of 4.5 per cent.

In other comments, Mr Tombini predicted that month-on-month inflation would begin softening this month, although year-on-year inflation might keep climbing due to an unfavourable base effect.

He also ruled out employing extreme measures to fight price rises in spite of the government’s use in recent months of unorthodox tools to control capital flows.

The government has increased taxes on lending and financial transactions in an effort to deter flows of “hot money” – speculative investment – into Brazil from abroad.

It “is the traditional instrument that is being used and will continue to be used”, Mr Tombini told Globo News.

People close to the central bank said extreme capital control measures, such as quarantine, were not “on the radar”.

Under this policy, investors are forced to deposit a portion of their money with the central bank for a period or incur a fee for early withdrawal.