Brazil’s Biggest Challenge Is to Tame Inflation, OECD Says

Brazil’s biggest challenge is taming inflation that is set to stay above the mid-point of the target range for at least the next two years, the Organization for Economic Co-operation & Development, or OECD, said.

Consumer prices, as measured by the IPCA index, will rise 6.5 percent this year, 6.2 percent in 2012 and 5.1 percent in 2013, the Paris-based organization estimated in a report released today. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

The government should tame spending to control inflation and implement reform of the nation’s pension, tax and savings account system to ensure higher investment rates that will bolster economic growth, the OECD said. Inflation slowed in mid- October for the first time in 14 months. Prices, as measured by the IPCA-15 index, climbed 7.12 percent in mid-October from a year earlier, compared with 7.33 percent the previous month.

“The key macroeconomic challenge is to damp inflation in a context of abundant global liquidity,” the OECD said. “Removing obstacles to investment will be crucial to sustaining strong economic growth.”

The central bank last week cut its benchmark Selic rate to 11.5 percent from 12 percent, saying this would protect Brazil from a more “restrictive” global economy without compromising the inflation target.

Gross domestic product growth will slow from 7.5 percent last year to 3.6 percent this year, 3.5 percent next year and 4 percent in 2013, the OECD forecast.

Spending on infrastructure should not be reduced as the government tames spending, while incentives for private investment in public works projects should be boosted, according to the report.

“Faster infrastructure development would help to achieve better economic and social performance,” the OECD said.