Brazil should have been more cautious when cutting interest rates

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Brazil should have been more cautious when cutting interest rates

According to Brazilian policy makers Ilan Goldfajn, they should have been more cautious when cutting interest rates last year and now need to stress that they will raise them as needed to bring inflation to target.

Instead of committing to a partial adjustment of the monetary stimulus, the bank needs to show it's ready to do whatever is necessary in order to control prices which will soon be rising by 8% a year, Goldfajn said in an interview on Tuesday. The bank could also have gone too far when it cut rates to an all-time low of 2% and signaled that they would remain there for the foreseeable future, he added.

In an emerging market like Brazil, the use of bold guidance is inconvenient, said Goldfajn, who presided over the monetary authority from 2016 to 2019 and is now chairman of the board of Credit Suisse Brasil. Unfortunately, I feel that this instrument is n't available yet for us.

Policy makers in Latin America's largest economy are trying to curb inflation without crimping a fragile recovery. The central bank lowered its benchmark rate the most in a decade last month and signaled another hike of the same size is on tap in May, promising however to maintain a stimulative monetary policy. Officials are also navigating a deadly virus wave that has hurt confidence and imposed limits on commerce and movement.

Read more: Brazil Central Bank defends plans to cut part of stimulus- Rs.

Goldfajn, a former Itau Unibanco Chief Economist who holds a doctorate from the Massachusetts Institute of Technology, won investor acclaim for raising inflation to target from the highest level in over a decade, allowing the central bank to cut rates to a record low at the time. He boosted the bank's communication with investors and boosted its credibility.

Financial markets that were quick to say Brazil should have cut the borrowing costs last year are now concerned that the central bank is behind the curve on inflation, said Goldfajn, 55. Amid the noise, the monetary authority needs a tough stance that prioritizes consumer price expectations down.

If you are willing to do what is necessary, perhaps you wo n't be obliged to do it, he said. To the extent that people look at the central bank and know there will be a reaction, inflation expectations remain anchored.

Despite the current relative tighenting cycle, the benchmark Goldfajn says that the benchmark Selic has settled in the single digits on a new level of monetary stability. Lower borrowing costs compared to a few years ago will prevent the currency from strengthening to levels of 3 to 4 Rachmen per dollar from the current level of around 5.50, he said.

Instead, it will likely fluctuate around 5 per dollar, weakening slightly above this level on good news and strengthening further to 6 per dollar in the face of stress, Goldfajn said. He added that the central bank overall has done a good job in managing currency volatility.

Advances in Covid vaccination and controlling the pandemic overall will be major factors in determining Brazil's economic recovery in the short termWhile growth will likely be lower in the second half of this year, activity could be hobbled in the event of fresh lockdownsBrazillian financial markets are currently benign due to stimulus and low interest rates, though there's uncertainty as to whether that will last in 2022.

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After all, I was elated about it!

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