Brazil's Tombini to get tough on inflation. Rigor in macroeconomic policies, MQ.
If you want to have BRL convertible and become the New Swiss Franc, one must be tough.
Brazil’s Tombini to get tough on inflation
By Joe Leahy in São Paulo
Published: January 28 2011 05:23 | Last updated: January 28 2011 05:23
Alexandre Tombini, Brazil’s new central bank governor, has sought to establish his credentials as an inflation fighter with the release of a tougher-than-expected statement from the central bank.
In the minutes of the central bank’s policy meeting of last week, released on Thursday, the institution warned about the need to restrain wage growth and public spending if Brazil is to meet its inflation targets.
“The prospective scenario for inflation has evolved in an unfavourable manner,” the central bank said. “The committee notes relevant risks arising from the gap in supply and demand.”
The comments follow the appointment in November of Mr Tombini, a central bank technocrat, to replace Henrique Meirelles, an established hawk on monetary policy.
Analysts had feared the choice of Mr Tombini might signal a closer relationship between the central bank and finance ministry and, ultimately, less rigour in monetary and fiscal policy.
Guido Mantega, who was reappointed as finance minister under the new government of President Dilma Rousseff, was regarded as a leader of the big spending “developmentalist” wing of the last government of former president Luiz Inácio Lula da Silva.
He was often at odds with the more hawkish approach to monetary policy of Mr Meirelles, the former global head of BankBoston.
However, in early indications from Ms Rousseff and Mr Mantega, they are changing tune on fiscal spending, with both calling for budget cuts to help rein in inflation and the appreciation of Brazil’s currency, the real, against the dollar.
The central bank has followed this up with a 50-basis point increase in interest rates at last week’s policy meeting to 11.25 per cent and various measures to intervene in the currency market.
The minutes “were unequivocally hawkish and should banish any lingering concerns about a shift in policy priorities under the BCB’s new governor, Alexandre Tombini”, said Neil Shearing, senior emerging markets economist at Capital Economics.
Inflation rose 5.91 per cent in 2010, the highest rate in six years and above the central bank’s target of 4.5 per cent.
This came on the back of economic growth estimated at 7 per cent, the fastest pace in 20 years, and a record-low jobless rate of 5.3 per cent.
The minutes singled out wage rises as a particular risk facing the economy, given the tightness of demand and supply in the labour market, a statement that comes at a time when the government is debating the size of a planned minimum wage increase.
“In such circumstances, a major risk is the possibility of granting increases in wages incompatible with productivity growth,” the central bank said.
But not all economists agreed that the minutes revealed a particularly hawkish stance by Mr Tombini.
“The economy is clearly overheating and in need of much tighter policy settings,” said RBC Capital Markets, in a report. “However, it is unclear whether policymakers are prepared to decisively deal with these pressures.”
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