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Two Brazilian Economists Say, Keep Low Interest and Don’t Worry About Inflation

Brazilian naval industry The idea of using low interest rates to keep the economy heated up has run into a wall. Most specialist believe that monetary policy based on low interest rates in order to stimulate consumption is not very efficient where family indebtedness and payment default rates are high.

However, according to other specialists, the government should maintain the low interest rate policy. These specialists see another problem, inflation, but say it can be disregarded.

The idea would be to accept the risk of higher prices in order to keep the economy steaming ahead. Their opinion is that although inflationary pressures will rise, they can be kept under control and not become a threat.

Even with inflationary pressures, these economists recommend maintaining present monetary policy that has reduced the country’s benchmark interest rate, the Selic, to historical low levels. There is a consensus among them that an economic recovery boosted by a stimulus will compensate for higher inflation.

This is based on the belief that inflation this year, as measured by the Broad Consumer Price Index (IPCA) will be lower than last year when it hit 6.5%, the government’s target ceiling. The official inflation target, for both 2011 and 2012 has been set at 4.5%, plus or minus two percentage points.

At the moment, inflation as measured by the IPCA for the last twelve months is 5.24%, just slightly above what it was in August 2011 for the last twelve months ending then (it was 5.2%). Market estimates for 2012 inflation are 5.2%, according to the Central Bank’s weekly survey (the Focus report).

According to André Braz, an economist at FGV, “Inflation at around 5% is not a threat to family purchasing power. What is unacceptable is inflation above 6.5%, the target ceiling, where the safety net wobbles and it gets hard to combat a further rise in inflation.”

Braz points out that salary increases above inflation have ensured that purchasing power has remained solid. “A point of reference for this position is the minimum wage that has risen above inflation, with accumulated real increases.

Last year it went up 14% to 622 reais. This year there are demands to raise it 8%, which is certainly more than inflation will reach,” he says.

Braz adds that measures by the government to sidestep the effects of the international crisis – reduction of interest rates, an exchange rate favorable for exports and consumers paying lower sales taxes – have as yet had only timid results, but should become more important over time.

“These are policy decisions that take a while to make a difference in the real economy. A reduction in interest rates, for example, usually takes around nine months to impact the market. In the meantime, the government’s main concern should be with protecting jobs and family income, even though there may be risks,” he concludes.

Miguel de Oliveira, an economist who is vice president of the National Association of Financial Executives (Associação Nacional dos Executivos de Finanças Administração e Contabilidade – Anefac), also considers lower interest rates healthy for the economy in spite of the threat of inflation.

“In a crisis, keeping jobs is more important than inflation. Avoid a recession. After the country starts to grow, you deal with inflation,” he says.

As for the sluggish state of the economy at the moment, Oliveira agrees with Braz: “The process is gradual. Investments fall because of the crisis. We expect things to improve some later this year and strong growth only next year,” declared Oliveira.

ABr

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