Brazil’s Lula Summons His Cabinet for Summit on Inflation Blues

Brazilian President Lula with ministers in capital BrasÀ­lia According to Brazil's largest circulation daily, Folha de S. Paulo, Brazilian President, Luiz Inácio Lula da Silva, his cabinet ministers and his main economic advisors are considering a range of measures, from budget cuts to pruning credit. with the purpose of curbing inflation.

The Brazilian leader wants to prevent inflation from exceeding 6.5%, the upper end of the government's target range, according to the newspaper. Among the measures considered is increasing the primary budget surplus to 4.8% of GDP from the current 3.8%.

The mini anti inflation summit includes Lula's Chief of Staff Dilma Rousseff, Finance minister Guido Mantega, Budget minister Paulo Bernardo, Central bank president Henrique Meirelles, State Development Bank president Luciano Coutinho plus advisers former Finance Minister Antonio Delfim Netto, economist Luis Gonzaga Beluzzo and Worker's Party Senator Aloizio Mercadante.

A report from Barclays Capital released last week anticipated the Brazilian Central bank will accelerate the pace of interest rate increases starting next month. The bank is expected to raise the Selic benchmark interest rate by 0.75% twice to 13.75% by the end of September.

Barclays estimates Brazilian inflation will peak at 6.6% in November before ending the year at 6.4% as food prices climb and domestic demand expands. The Central bank targets inflation of 4.5%, plus or minus two percentage points.

Brazil's Central bank director for monetary policy, Mario Gomes Torós, is quoted by the Brazilian press in New York stating that 2009 inflation forecasts are "well anchored."

"Inflation in Brazil hasn't quickened as fast as most emerging market countries because food costs have a lower weighting in our consumer price indexes," said Torós adding that food accounts for 21.1% of Brazil's IPCA index, compared with 33% in China and 22.7% percent in Mexico.

He also argued that the increase in Brazilian imports has helped keep inflation under control. Imports grew 56% in May from a year earlier on the back of a 33% gain of the real over the US dollar since 2007.

Brazilian Deputy Treasury Secretary, Paulo Valle, addressing investors in New York said the government was adjusting its debt strategy because inflation uncertainty had reduced investor demand in local bonds.

"While we have this inflation uncertainty, there will be an impact in our debt strategy, demand has been declining a little," said Valle.

With bond yields on the rise, the Brazilian Treasury now plans to reduce the share of floating-rate paper to a level closer to 30%, still within the target of 25-30% set in its annual borrowing plan, Valle added. The portion of floating-rate paper in Brazil's public debt amounted to 35.3% as of April.

On the other hand, the portion of fixed-rate debt should increase from 32.2% in April to something not much above 35%, still within the Treasury's target of 35-40% for this year, said Valle.



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