BRASILIA, May 19 (Reuters) - Brazil’s government is confident that greater coordination between monetary and fiscal policies will help bring inflation back on target by late 2016, despite market skepticism, a senior official told Reuters on Tuesday.
Traders’ forecasts, however, that Brazil will cut interest rates early next year are premature, the official added.
With annual inflation hovering at an 11-year high above 8 percent, most economists doubt Brazilian policymakers will be able to make good on promises to hit the 4.5 percent center of the official target range by late next year.
“I know it is crazy to think that (inflation converging to target in 2016), but all policies are pointing in the same direction and that makes it viable,” said a member of the government’s economic team on condition of anonymity.
President Dilma Rousseff has embraced a major shift in economic policy since narrowly winning re-election in October. With the economy stumbling, inflation on the rise and public finances in a shambles, Rousseff has sought to get the country back on a track with a mix of orthodox economic policies that she largely shunned in her first four years in office.
On the monetary policy side, the central bank has raised interest rates by 225 basis points to 13.25 percent in the past six months to curb inflation. It has also left the door open for more rate hikes, despite concerns that Brazil’s economy is headed for its worst recession in 25 years.
On the fiscal front, Rousseff’s new finance minister, Joaquim Levy, has embarked on an aggressive belt-tightening campaign to curtail public spending and salvage Brazil’s investment-grade credit rating. He has also pushed through tax measures aimed at boosting government revenues.
Levy is expected to announce as soon as Thursday a freeze of up to 80 billion reais ($26.50 billion) in government spending this year to reach its key fiscal goal.
The government hopes the return to fiscal discipline will help ease price pressures, aiding in the central bank’s battle against inflation. That, in turn, should help bring down inflation expectations, the official told Reuters.
Economists expect inflation to end 2016 at 5.50 percent, still above the center of the target range, according to a central bank poll released on Monday.
Policymakers would only consider slashing borrowing costs once their projections show inflation easing below the center of the target, the official said.
The central bank poll showed analysts believe Brazil’s benchmark Selic interest rate will end 2016 at 11.75 percent. Analysts say many in the market see rate cuts as early as the first quarter of 2016.
“Nobody is thinking of cutting rates,” said the official. “Inflation at current levels is unacceptable.”
Brazil is one of the few major economies raising rates at a time when the rest of the world continues to ease policy to face an uneven global recovery.
$1 = 3.0194 Brazilian reais Writing by Alonso Soto; Editing by Andrew Hay