Brazil Puts the Brake on Growth to Avoid Inflation

Street vendors in Rio, Brazil The Selic, Brazil's reference key interest rate. will only begin to fall when inflation approaches the 4.5% center-point of the government's annual target, Brazilian Finance minister, Guido Mantega, said on Wednesday, August 20.

"Until this happens, only then will interest rates be reduced," Mantega said in a nationally broadcast radio interview. He added that Brazil's retail inflation would end 2008 at between 6% and 6.5%. The official IPCA index ended July at a 12-month rate of 6.37% fueled by food prices.

Brazil's central bank has raised the country's reference Selic interest rate by 1.75 percentage points so far this year to 13% annually in an effort to curb inflation pressure brought by elevated food and fuels prices.

In the minutes of its July monetary policy meeting, the Central Bank said it would aim to bring inflation to the 4.5% center-point of the government's official target range by the end of 2009.

Brazil's inflation targeting program permits a margin of tolerance of two percentage points on either side of the center point, allowing annual inflation up to 6.5%.

Mantega Wednesday said the government was considering reducing the pace of economic growth in an effort to maintain sustainable long-term growth.

"We're moderating the pace of economic growth to adapt to a situation of international stress," said Mantega who estimated economic growth would end 2008 at between 4% and 4.5%. This means bringing domestic consumption growth down to around 6.5% from current 8% levels.

Brazilian President Luiz Inácio Lula da Silva administration has been criticized by the private sector for not doing enough to control inflation through a reduction in government spending, but Minister Mantega said current levels of outlays were "adequate."

"We are diminishing spending as a percentage of growth," he said. "GDP has been growing at a rate of around 5.5% and spending has grown at a rate of around 4%," he insisted.

Mercopress

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