Brazil cuts inflation target for first time in over a decade

Brazil’s government on June 29 lowered its annual inflation target for the first time in more than a decade, seeking to turn the page on recent double-digit jumps in consumer prices and bolster investors’ confidence about future economic stability.

The National Monetary Council, comprised of heads of the finance and planning ministries and the central bank, cut the inflation target to 4.25 percent in 2019 and 4.00 percent the following year, from 4.5 percent at present.

The tolerance range was maintained at 1.5 percentage point.

The reduction, predicted by a poll of economists in January, followed a plunge in annual inflation from nearly 11 percent in early 2016 to 3.6 percent in June.

A stronger commitment to low inflation could boost Brazil’s long-term growth by reducing investor uncertainty, without closing the door to further interest rate cuts by the central bank this year, economists said.

Economists forecast an inflation rate of 3.5 percent for 2017, breaking a sequence of seven straight years of Brazil overshooting its target. Under the administration of former President Dilma Rousseff, who was impeached last year, economists accused policymakers of pursuing the ceiling of the goal and not its midpoint in order to avoid rate hikes that could hurt growth.

“Economic policy has all the necessary conditions in terms of inflation, transparency and credibility to remain committed to these inflation targets,” central bank chief Ilan Goldfajn told journalists.

Yields on longer-dated interest rate futures slipped in early trading, suggesting investors saw the new targets as consistent with forecasts of interest rate cuts. Global risk aversion pushed yields up again later in the day, traders said.

Growing investor optimism about Brazil’s economic prospects contrasts with an escalating political crisis that threatens to remove President Michel Temer from office.

Goldfajn said the targets took into account the political environment, and also responded affirmatively when asked if he expected to stay in his post even if Temer is suspended from office should the Supreme Court try him on corruption charges. Temer appointed Goldfajn to lead the central bank last year.

The central bank has been expected to cut its benchmark rate to 8.5 percent by December, from 10.25 percent currently, according to a central bank survey of economists released on Monday. The bank has already lowered the benchmark rate by 400 basis points since October.

Before the decision was announced, economists had been forecasting an annual inflation rate of 4.25 percent for the years of 2019, 2020 and 2021, according to the central bank.

Brazil began targeting inflation in 1999, with the 4.5 percent target being first adopted for 2005.

Goldfajn had long said Brazil should aim for a target more in line with other emerging markets. Latin American countries such as Mexico and Chile target inflation at 3 percent.

Source: Reuters Brazil