May 16, 2019 / 4:45 PM / 3 months ago

Brazil won't sacrifice curbing inflation for growth, says cenbank chief

BRASILIA (Reuters) - Brazil’s central bank will not sacrifice controlling inflation for boosting growth, even though policymakers are disappointed with the economy’s performance this year, central bank president Roberto Campos Neto said on Thursday.

Responding to questions from lawmakers at a congressional budget committee hearing in Brasilia, Campos Neto said the economy likely contracted slightly in the first quarter, but growth has only been partially interrupted and will return.

“To think that we are going to swap keeping inflation under control, a system of credibility in the long term, for short (term) growth, is fanciful,” Campos Neto said, adding that history shows this does not work and ultimately leads to greater crises.

Campos Neto repeated his view that the best way to generate strong, steady growth is to keep inflation and inflation expectations under control.

Annual inflation in Brazil is running at just under 5.0%, above the central bank’s year-end target of 4.25%. Yet growth is anemic, struggling under the weight of uncertainty surrounding the government’s fiscal reform efforts.

A key condition for getting inflation and inflation expectations down is to approve and implement fiscal and economic reforms, Campos Neto said. That will boost confidence and the investment needed to revive growth, he said.

“There is no country in the world with low inflation, low interest rates, anchored inflation expectations and a messy fiscal situation. It just doesn’t exist,” Campos Neto said.

“It was hoped that the fiscal situation would be addressed quickly. The market is waiting for reforms,” he said, referring not only to fiscal reforms but other adjustments like tax reform.

The pension reform bill’s slow progress through Congress has hit Brazilian markets. The real has weakened below 4.00 per dollar and the Bovespa stock market is down more than 5% in May, on track for its biggest monthly fall in almost a year.

In a wide-ranging question-and-answer session with lawmakers, Campos Neto also said the central bank is constantly evaluating the ideal level of foreign exchange reserves. But since the central bank does not have an exchange rate target and believes in flexible currencies, there is no need for the bank to have a special committee for FX intervention, he said.

The central bank has come under growing pressure to sell some of its huge $384 billion stockpile of foreign exchange reserves to raise funds for a variety of purposes, such as meeting the government’s social security commitments.

Campos Neto said that would be a quick way to lose credibility and send the country into a downward spiral.

On the domestic front, Campos Neto also said the cost of credit to the average Brazilian is too high and that the level of debt taken on to fund consumption is higher than average.

($1 = 4.01 reais)

Reporting by Marcela Ayres; Writing by Jamie McGeever; Editing by Bernadette Baum and Jeffrey Benkoe

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