Just what is the Central Bank playing at?
The fashionable question of the day in Brazil’s economist circles is whether the Bank has tossed in a dash of GDP growth to its inflation-targeting menu. The latest rate cut leaves the Selic inter-bank rate 3.5% lower than last August with more to come (see blog of May 4). That risks a spike in inflation, squeal many economists, asset managers and the like.
These naysayers claim that the Central Bank has become unpredictable in its monetary policy decisions, that its newish President Alexandre Tombini (appointed by Dilma Rousseff at the start of her mandate last year) is in hock to the Ministry of Finance, and is putting long-term stable growth on the line for short-term GDP gains. A recent Bloomberg survey did indeed find that the Brazilian bank has become the most unpredictable among the world’s top 10 economies.
Not so, cry Tombini and his supporters. Lower global growth and weak Brazilian manufacturing and credit data in the first quarter justify the rapid monetary policy loosening that still leaves Brazil with some of the highest real rates in the world.
For now, data bear the Tombinists out as inflation has been steadily coming down with economist expectations at 5.12% this year. Indeed, the Central Bank may lower the limbo pole still further and go for a Selic rate of 8.5%.
If Tombini’s right that the Brazilian economy will just grind along and inflation remain a wet rag, as seems more likely every day with the dismal news from Europe, these lower rates could become a permanent feature in hyper-inflation ravaged Brazil. That would position Tombini, like Fed boss Alan Greenspan, as the great champion of the credit economy. It remains to be seen if he knows when to tap on the brakes.