By Marcela Ayres
(Reuters) -Brazil’s central bank monetary policy director Nilton David said on Thursday that the decision by policymakers to interrupt the monetary tightening cycle requires keeping interest rates unchanged for longer than if they had continued raising them.
“This decision was made by the committee and it is being applied now, which is why we are in the very prolonged period (of unchanged rates),” he said at an event hosted by the Spanish Chamber of Commerce in Sao Paulo.
Last month, Brazil’s central bank kept its benchmark Selic rate steady at 15%, the highest level in nearly 20 years, for a second consecutive meeting, signaling that borrowing costs will remain elevated for an extended period.
According to David, the use of the term “very prolonged” in the bank’s official communication basically reflects the trade-off resulting from policymakers’ decision not to raise rates beyond 15%.
The central bank’s move to halt interest rate hikes without waiting for inflation expectations to decline further was “very well received” by markets, he said.
Still, David noted there is unanimous discomfort within the rate-setting committee over market inflation expectations remaining above the 3% target.
As the central bank works to bring inflation back to its official target in a steady and sustainable way, David said the economy must not grow faster than its long-term capacity. He noted that Brazil is currently experiencing such above-potential growth.
He pointed to the sharp rise in employment and strong income growth in Latin America’s largest economy.David added there seems to be a consensus that the central bank is doing the right thing to guide inflation toward its target, amid what he described as a “well-behaved” exchange rate and lower volatility along the yield curve.
He also noted that the nearly 10% increase in Brazil’s foreign exchange reserves this year was due to the profitability of the investments, not to dollar purchases, adding they are valuable asset and remain at a reasonable level.
(Reporting by Marcela Ayres, Editing by William Maclean)
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