A small piece of good news on Brazil’s inflation rate last week probably gave the central bank its best pretext yet to finally stop raising interest rates after more than one year of non-stop increases. But economists still think it’s too early to proclaim “mission accomplished”.
Keeping interest rates at the current 11 percent will do little to reduce inflation in the months ahead, economists at Itau Unibanco, Santander and Bank of America Merrill Lynch said, despite a smaller-than-expected increase in consumer prices last month.
Their pessimistic outlook contrasts with the central bank’s, which has signaled it is willing to stop raising rates soon by saying that the 375-point increase since April last year was “sizable” and is yet to have a meaningful effect.
Behind the divergence are their opposing views on Brazil’s fiscal policy. They differ on how President Dilma Rousseff should be treating federal money on the run-up for a re-election campaign later this year.
The central bank says Brazil’s fiscal policy is moving towards neutrality. That is, it is boosting inflation at a slower pace than before, and will soon stop being an obstacle to monetary policy.