Brazil to Trim Inflation Goal as It Seeks Convergence With Peers

(Bloomberg) -- Brazil’s government is planning to reduce the inflation target it sets its central bank to 3.5% by 2022 from 4.25% now in an attempt to align its goal with those of other emerging market countries, according to three officials with knowledge of the matter.

Members of the economy ministry and the central bank are in agreement to cut the target by a further quarter-point in a decision to be made at the country’s monetary council meeting next week, said the people, who requested anonymity because the discussion isn’t public. Brazil currently targets inflation of 4.25% this year, 4% in 2020 and 3.75% in 2021. The tolerance range is plus or minus 1.5 percentage points and there’s no plan to change that, they added.

While the change may force the central bank to adopt tighter monetary policy in the future, in the short term it is likely to boost investor confidence in the government’s commitment to reining in prices, bringing long-term inflation expectations lower. Consumer prices are forecast to rise 3.84% in 2019, well below this year’s target, according to the latest central bank survey of economists.

Asked about the change to the 2022 inflation goal, the economy ministry said a decision will be made during the monetary council’s meeting next week. The central bank declined to comment.

Peer Pressure

Other Latin American nations have stricter inflation goals. The central banks of Chile, Colombia and Mexico target 3%. While the tolerance bands are narrower in other countries, Brazilian policy makers oppose such a move in order to cushion the impact of possible inflation shocks, the people said.

Brazil is taking advantage of the disinflation process associated with a deep recession that ended in 2017 to lower the target that got stuck at 4.5% for more than a decade, during the governments of leftists Luiz Inacio Lula da Silva and Dilma Rousseff.

During the administration of former President Michel Temer, the monetary council changed its approach to inflation targeting to shore up its credibility with financial markets. Starting in 2017, it set the goal for three years in advance, and for the period starting in 2019 it reduced the target by 0.25 percentage points for each subsequent year.

Brazil needs to gradually lower its inflation rate to levels seen in “decent countries,” former central bank director Luiz Fernando Figueiredo said in an interview last week. He forecast consumer price rises will remain below target next year as well, allowing the central bank to cut interest rates.

--With assistance from Josue Leonel.

To contact the reporters on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net;Rachel Gamarski in in Brasilia at rgamarski@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, ;Walter Brandimarte at wbrandimarte@bloomberg.net, Bruce Douglas

©2019 Bloomberg L.P.