Brazil: Fighting Inflation Is Job One

Antônio Palocci, the Brazilian Finance Minister is very happy
with the Brazilian Central Bank, which has just lowered the
country's prime interest rate by 2.5 percent. But Palocci promptly
announced that the fight against inflation continues, since according
to him, inflation corrodes wages and impedes growth.

AB

 

Brazil's Minister of Finance, Antônio Palocci, remarked that the 2.5 percent reduction of the prime interest rate (Selic) to 22 percent per annum, determined on Wednesday (20) by the Brazilian Central Bank, is the result of efforts in the areas of both fiscal and monetary policy over the course of the year. He underscored that the reduction "favors the economic process, and this is what we all desire."

Palocci commended the Central Bank's initiative for being certain and cautious. "We follow the activities of the Central Bank, always giving the Bank autonomy to make its decisions. We believe that the Copom (Comitê de Política Monetária— Monetary Policy Committee) has the technical capacity to make these decisions in the best possible manner, and I continue to be convinced that it has been quite correct in the process of determining monetary policy during the course of the year. This is not just an opinion: it reflects the facts. If we observe current and future tendencies for inflation, we shall see that, fortunately, Brazil is emerging a winner in this area, which is one of our biggest economic problems," he said.

Palocci also recalled that other results of this economic policy are appearing now, such as the reduction in the net debt/GDP ratio and the decline in inflation. Nevertheless, he said that the fight against inflation is permanent, since inflation corrodes the wages of the poor and impedes economic growth, as well as disorganizing the initiatives of businessmen.

"Monetary policy is being run at an adequately gradual pace. We keep one eye on inflation and all Copom decisions have a strong technical basis," said Palocci.

The Minister said the Copom decision (the key rate dropped from 24.5 percent per year to 22 percent) must be seen as part of fiscal and monetary policies in effect since the beginning of the year which led the recovery from the effects of the crisis of 2002. "Those policies have been austere and serene. We have been aware of the danger that inflation poses to the poor," he said.

Palocci insisted that the fight against inflation must continue and that it is a permanent threat. He also rebutted the remark by vice president José Alencar that 2003 was a lost year, saying that with improved economic indicators it will be possible to achieve renewed growth. The minister pointed out that at the beginning of the year the forecast for inflation was running at 40 percent, the debt/GDP ratio was at 62 percent, and 42 percent of Brazil's debt was in foreign currencies. "This has been an important year for balancing accounts and renewed sustainable growth," he concluded.

Planning Minister, Guido Mantega, also believes that there are reasons to commemorate the prime reduction. "The Central Bank's Copom went beyond market expectations. They gave us a pleasant surprise," said the minister.

Mantega added that Copom's decision will make it possible for the government to work with a descending interest rate curve aimed at boosting renewed investment and economic growth.

Encouraging for Citigroup

The vice president of Citigroup and former director general of the International Monetary Fund (IMF), Stanley Fischer, says his firm will expand its presence in Brazil. Fischer said Citigroup has confidence in Brazil's fiscal and monetary policies. "I was here in March when there was a great deal of uncertainty even though it was clear that things could improve. And now they have improved. It is very encouraging," said Fischer.

He also added that the fact that inflation and interest rates were falling in Brazil was a good sign. "This is the result of firm policy by the government, especially fiscal policy. This changes the Brazilian scenario where the interest rate is now lower. The continuation of such firm policies will permit renewed economic growth and attract investments," declared Fischer.

 

The material for this article was supplied by Agência Brasil (AB), the official press agency of the Brazilian government. Comments are welcome at lucas@radiobras.gov.br