Could Brazil be on the cusp of adopting a Turkish-style monetary policy, J.P. Morgan analysts ask.
After four rate cuts it seems determined to take the official Selic rate into single-digit territory. Aldo Mendes, a deputy governor at the bank, told investors in London last week that he was confident of meeting the 4.5 percent inflation target this year. Friday’s data showing annual inflation at an 11-month low of 6.22 percent should have given policymakers some more ammunition.
Yet it looks unlikely that inflation can fall this year to 4.5 percent — on average analysts expect 5.3 percent. That’s better than last year’s 6.5 percent but government plans for a spending binge to boost growth are bad news for the central bank’s target. Inflation expectations are steadily trending higher — analysts surveyed by the central bank predicted 2014 inflation above 4.5 percent for the first time last November and now this is close to 5 percent, JPM analysts note. The risk for the central bank is it will lose credibility if it insists on keeping policy loose in the face of rising inflation expectations. There is no “free lunch”, JPM says:
Lower rates could mean credibility costs and in turn higher inflation….It seems the BCB is losing credibility as we see changes in the market’s inflation expectations for the medium term. Taking that and our strong activity forecast from the second quarter onwards we now believe it will take much longer for inflation to converge to the middle of its target range. Therefore we are raising our inflation forecast to 5.5 percent in 2013 from 5 percent previously.