BRASÍLIA--Brazil will have to raise interest rates further to
win its battle against inflation, the country's central bank
signaled Thursday.
"Advances achieved in the fight against inflation...aren't
enough yet," the bank's monetary-policy committee said in minutes
from last week's meeting, when its policy rate, known as Selic, was
raised to 12.25% from 11.75%.
The comments were seen as a sign that the Selic is likely to go
up again in the next monetary-policy meeting, in March.
"The bank changed the tone," said Bruno Rovai, Brazil economist
for Barclays Capital Inc. in New York. The remarks "were truly
hawkish," he said.
Brazil has been struggling with elevated inflation for years.
The central bank began raising borrowing costs in April 2013, when
the Selic stood at a historic low of 7.25% and annual inflation was
6.49%
Almost two years later, the IPCA consumer-price index remains at
the same level, and the central bank says it is likely to go up in
the short term.
Brazil's annual inflation was 6.41% in 2014, above the central
bank's 4.5% target and just below the 6.5% maximum tolerated.
A combination of factors helped push up prices, economists say.
Among them is an increase in government spending, as Brasília tried
to pump up a weakening economy that was flat in 2014 and is
forecast to expand just 0.13% this year, according to a
central-bank survey with economists.
Brazil's Treasury Secretary Marcelo Barbosa Saintive said
Thursday that in 2014 spending by the central government--which
excludes states and state-controlled companies--grew at a 12.8%
pace. That was in a year when revenue fell 1.79%, in an
inflation-adjusted basis.
Government spending, economists say, can fuel inflation by
increasing overall demand in the economy. And, as spending grows
faster than income, the resulting hole in the national budget can
weaken the currency, leading to higher prices for imports,
economists say.
The Brazilian real was valued at 2.42 to the dollar a year ago,
but has fallen to 2.56 now.
A new economic team led by Finance Minister Joaquim Levy, who
took the post from long-standing minister Guido Mantega earlier
this month, has promised to reshuffle government accounts.
Tighter fiscal policy in 2015 is likely to help in taming
inflation, the minutes said, adding that inflation will begin "a
long cycle of declining" later this year, and move toward target in
2016.
Inflation will remain elevated in the short term due in part to
increases in government-regulated prices on things such as gasoline
and electricity. Brasília has avoided price increases in the past
few years to stimulate growth, and now needs to catch up.
The central bank now forecasts a 9.3% increase in controlled
prices this year, up from 6% previously.
Economic growth, however, will be "below potential" in 2015, the
bank said. Low growth tends to weaken inflation, economists
say.
One risk looming over the economy, and not discussed in the
minutes, is the likelihood of power rationing thanks to a prolonged
drought and a lack of investment in the grid, analysts say. That
could cause the central bank to reverse the monetary
tightening.
"All that has been discussed in the (central bank's) minutes
doesn't take into account a possible power rationing. If there is
one, economic activity will be hit and, in that case, I wouldn't
rule out a rate cut later this year," said Cristiano Oliveira,
chief economist at Banco Fibra, in São Paulo.
A widening embezzlement scandal around government-controlled oil
producer Petróleo Brasileiro SA, or Petrobras, could also impair
economic growth, economists say. The case is threatening to reduce
investments by Petrobras and its suppliers, weakening a major
growth engine for Latin America's largest economy.
Some relief could come from overseas. The U.S. Federal Reserve
indicated Wednesday that it will leave rates close to zero until at
least midyear, reducing the risk that the real would be hit by
international investors selling their assets in Brazil to take
advantage of higher yields in the safer U.S. market.
The Fed's decision "creates room for the Brazilian central bank
to focus on domestic issues," said Barclays' Mr. Rovai.
Write to Paulo Trevisani at paulo.trevisani@wsj.com and Rogerio
Jelmayer at rogerio.jelmayer@wsj.com
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