The Economist – from the print edition, 10/29/2011
FOR much of the last century inflation was as prominent a feature of Brazilian life as football. It was finally tamed, first by the Real Plan of 1994 involving a new currency and fiscal measures, and then from 1999 by requiring the Central Bank, which was granted operational independence, to set interest rates to meet an inflation target. Since 2005 that target has been 4.5%, plus or minus two percentage points. So the Central Bank surprised everyone in August when it cut its benchmark rate by half a point (to 12%) even though inflation was then at 6.9%. On October 19th, the bank did the same again. So is the government of President Dilma Rousseff, in office since January, giving priority to other goals, such as sustaining growth and preventing the overvaluation of the currency, rather than keeping inflation low? And has the Central Bank lost its independence?
No, say officials, who cite two sets of reasons for the rate cuts. First, having overheated last year, the economy stalled in the third quarter, partly as a result of earlier interest-rate rises and modest fiscal tightening. The consensus forecast is for GDP to expand by only 3.3% this year. Second, the bank argues that inflation was boosted by one-off factors, such as big rises in municipal bus fares and a shortage of ethanol (widely used as vehicle fuel in Brazil). In the minutes of its August meeting, the bank’s monetary-policy committee stated that the deteriorating outlook for the world economy and falling commodity prices would put downward pressure on prices in Brazil, allowing inflation to reach the 4.5% target in the course of next year.
There are indeed signs that inflation is starting to fall. But the government’s critics argue that by starting to cut so early and so aggressively, while inflation is still almost three points above the target, the bank has damaged its hard-won credibility. As a result, inflation expectations for the years ahead are rising. Marcelo Carvalho, an economist at BNP Paribas, reckons inflation will only fall to 5.5% by 2013 (and that assumes the bank hikes rates again). The minimum wage is due to rise by 14% or so in January and unemployment remains low. The biggest problem is that some prices and wages are indexed to last year’s inflation, a hangover from the past. “What worries me is that this is a slippery slope: the thinking seems to be that inflation of 5% or 6% is fine,” says Mr Carvalho.
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Posted by Brazil Institute 
Brazilian Central Banker confounds critics
April 17, 2012Andre Soliani – Businessweek, 04/16/2012
Alexandre Tombini. Source: Businessweek
No central banker in the world’s top 10 economies has surprised analysts as frequently as Brazil’s Alexandre Tombini.
Since taking office 15 months ago, Tombini set interest rates lower than economists expected in three out of 10 policy meetings, including an August reduction that all 62 analysts surveyed by Bloomberg failed to anticipate. Russia’s central bank, the second most unpredictable, defied economists in three out of 14 rate decisions in the same period.
So far, Tombini has been vindicated. Inflation in Brazil, at 5.24 percent in March, is easing at a pace faster than analysts forecast. While investors have speculated that Tombini may be yielding to political pressure to lower rates, his gloomy assessment of the world economy and risk-taking may prove correct, according to Citigroup Inc.’s Dirk Willer. Tombini will cut the benchmark rate by three-quarters of a point to 9 percent tomorrow, according to a Bloomberg survey of 55 analysts.
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