In the last few days, Brazil’s Central Bank head Alexandre Tombini shed a good deal of light on the CB’s policy agenda. Following his much-debated remarks at a CB conference in Rio last Thursday, Tombini gave a revealing interview to the Estado newspaper yesterday.
In yesterday’s interview, he signaled a bold intent of testing lower rates, endorsing (perhaps for the first time) a view that the economy has been trapped in a “bad equilibrium” of unnecessarily high real rates. Tombini is aiming for a “better” equilibrium.
At the same time, his note that inflation has rarely fallen below a “basal level” of around 5.5% suggests acceptance that it may take longer for inflation to converge to the 4.5% target.
Tombini welcomed the recent weakening of the real, but suggested the CB would act against further decline. He even mentioned selling reserves, as was done in September 2011.
Finally, he recalled the role of macro-prudential policies in dealing with “imbalances in the credit market”.
Tombini’s interview reinforces some analysts opinion that the Selic will cross below 8%. It also suggests that, at current levels, the real is more likely to strengthen than to weaken.
Interview highlights below (via Itau’s Guilherme da Nobrega):
Tombini notes that 4% growth in an economy like Brazil is “very satisfactory” in current global circumstances. He says central banks around the world are debating what’s making inflation more “resilient” (possibly too many supply shocks). He speaks of a “basal inflation”: since inflation targeting began in Brazil in 1999, inflation was lower than 5.5% on only three years.
On bank lending and macroprudential measures
Macroprudential measures do not replace rate hikes to control inflation, but help correct imbalances in credit markets. They could be could be “used again in this context”.
Loan default has been an issue in certain segments, such as car loans. Now that the economy is picking up, the picture should improve.
On the currency
The recent weakening of the real reflects lower rates, CB intervention, inflow controls (notably limits on export prepayment) and, more recently, global risk aversion. The FX market is “calm” . Tombini recalls that, in September 2011, it took only two rounds of dollar sales to restore tranquility. He added that the BC is always ready to act when the FX markets becomes “dysfunctional”.
On the pace of rate cuts
Any further monetary easing “will have to be conducted with parsimony”. Tombini recalled the words from the latest policy minutes.