BRASILIA, June 21 (Reuters) - A majority in Brazilian President Michel Temer’s economic team backs a moderate cut in the 2019 inflation target to avoid signaling markets future monetary policy moves, a senior official who will be involved in any decision told Reuters.
A sharp drop in inflation, which is well below the current target of 4.5 percent, has convinced the administration it needs to set a lower goal for 2019. Government officials, however, are still discussing whether to lower the target to 4.25 percent or a more aggressive 4.00 percent.
The National Monetary Council, the country’s top economic policy body made up by the finance and planing ministers and the central bank chief, is scheduled to decide on the 2019 target at its next meeting on June 29.
“It is better to opt for a target that does not signal monetary policy decisions in the short-term,” said the official, adding that a majority in the economic team agrees with that view. “Its best to opt for a target that is closer to market expectations for that year.”
Annual inflation at the end of 2019 is seen at 4.25 percent, according to a weekly central bank survey of economists.
A target below 4.25 percent could prompt the central bank to significantly reduce the pace of interest rate cuts in coming months in order to lower inflation expectations.
The official said that the council still has to monitor the evolution of inflation expectations before making a final decision.
A second, lower-level official confirmed most members of the economic team preferred a moderate target cut.
The central bank has already signaled it could dial back the pace of rate cuts amid a political crisis that threatens to unseat Temer and derail his austerity agenda to plug a widening fiscal deficit.
A sharp drop in annual inflation, which hit a 10 year low of 3.60 percent in May, has pushed the central bank to cut 400 basis points from its benchmark Selic rate in less than a year.
Economists polled by Reuters in late May were split on whether the central bank would opt for a symbolic inflation target cut to 4.25 percent or a more aggressive move to 4.0 or 3.5 percent.
Both the finance minister and central bank declined to comment for the story, saying the decision will be taken next week by the council.
The planing ministry did not respond to an email seeking comments. (Reporting by Alonso Soto; Editing by Bernard Orr)