|Café Brazil: FT Latin America Agenda|
||02/12/08 08:00 AM |
0 Brownie Points
Inflation rears its head and roars|
3 Brownie Points
| - In Brazil Even in Brazil, a comparative haven of stability compared to some of its neighbours, inflation is again causing concern. |
Perhaps this government's greatest achievement has been not to fiddle with the previous one's orthodox system of inflation targetting, in which the central bank is free to set interest rates according to the inflation outlook. Thanks to a combination of other orthodox policies (a credible floating currency and a steady reduction in the ratio of government debt to gross domestic product) and benign global conditions, the central bank has been able to bring its target overnight rate steadily lower, from 19.75 per cent in August 2005 to 11.25 per cent today.
But now prices are moving upwards again. The economy, previously stuck in a rut at annual growth rates of about 2.5 per cent, is now growing by about 5 per cent. Economists who thought higher rates of investment would produce higher growth and lower inflation are now thinking again. Many who expected the central bank to go on cutting rates this year now expect it to stay put. Some are even thinking the unthinkable: that rates may have to go up.
That would be deeply unpopular and anathema to the government. But - like its neighbours - it seems to prefer the prospect of rising inflation to that of the effort needed to tackle the high government spending (not to mention the hugely expensive and inefficient tax system) that lies behind it.
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