Brazil Is Not Afraid of Inflation and Plans to Further Cut Interest Rates

Inflation in Brazil
The Brazilian government set its inflation target for 2011 at 4.5%,
seeing no evidence of significant inflationary pressures going forward.
May consumer price inflation or IPCA, was 0.47%, and 5.2% in the last
twelve months and is expected to have slowed down further during June.

The decision to keep the target unaltered from last year underscores the government's "goal of maintaining the credibility and flexibility of its monetary policy," the Finance Ministry said in a statement. The target was unveiled by Planning Minister Paulo Bernardo.

"Inflation globally will accommodate (to lower levels), with no evidence of price peaks in the future." the statement said. "Despite all that, good policymaking practice calls for prudence."

Brazil's Central Bank (BC) uses the IPCA consumer price index as a guide when setting interest rates. The May benchmark index little changed from April, but some economists fear that a recovery of Brazil's economy could trigger a sprint in consumer prices inflation.

Brazil's Central bank has reduced interest rates by 450 basis points since the beginning of the year, cutting in four straight policy meetings to help lift Latinamerica's largest economy out of recession. The so called Selic rate now stands at 9.25% but could drop further at the July 22 meeting of the bank's monetary committee.

According to the Central Bank's weekly survey of 100 analysts and economists from banks and brokerages, released earlier in the week, expectations call for a 2009 IPCA inflation rate of 4.4%. Inflation in 2008 was 5.9%. The survey also showed analysts expecting Selic to end the year at 8.75%.

The economy contracted 0.8% in the first quarter of 2009, after a 3.6% plunge in the fourth quarter of last year. It is expected to contract 0.5% in 2009, compared to over 5% growth in 2008.

Mercopress

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