Rousseff voices alarm as inflation nears bank limit

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Dilma Rousseff, Brazil’s president, has warned of “immensely” worrying inflation as price rises in Latin America’s largest economy risk exceeding the central bank’s limit.

The warning follows an interest rate increase by the central bank last week that analysts criticised as too little to arrest inflation, which hit 6.44 per cent in mid-April.

The official target for inflation is 4.5 per cent plus or minus 2 per cent.

“We are immensely worried about inflation and there’s no situation under which the government would let its guard down when it comes to controlling inflation,” Ms Rousseff told reporters.

Brazil’s economic revival of the past decade has been partly attributed to its success in battling the country’s former scourge of runaway prices.

Brazil’s new central bank chief, Alexandre Tombini, began a tightening cycle this year when he took over, increasing interest rates in three steps from 10.75 per cent to 12 per cent last week.

The government has backed up interest rate rises with a series of macro-prudential measures and steps designed to slow credit growth, such as increases in bank reserve requirements and taxes on borrowing.

The government is concerned that increasing Brazil’s interest rates too much will stifle economic growth, which the government has forecast at 4.5-5 per cent this year. Brazil’s real interest rates are already the highest of any large economy.

But analysts believe the government will have no choice but to eventually follow more conventional steps and push interest rates higher, even at the cost of growth.

“It’s good to see that the president is immensely worried about inflation but it would be nice to see her say we will do whatever it takes [to bring inflation back to target], even if that means that we will have to go through a period of lower growth,” said Tony Volpon, head of emerging markets research for the Americas at Nomura.

The government is betting that developed economies will end a long period of easy monetary policy later this year or early next and commodity and food price inflation will start to fall.

On the flipside, if this does not happen and the government misses its inflation targets for the third year running in 2012, inflationary expectations in Brazil will be cast adrift.

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