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How much, not if: case for lower Brazil inflation goal strengthens - Reuters Poll

By Silvio Cascione

By Silvio Cascione

BRASILIA (Reuters) - A strong consensus has emerged among economists over the likelihood of a lower inflation goal in Brazil, even though the first target reduction in more than a decade is likely to be a small one, a Reuters poll showed on Friday.

A vast majority of the economists surveyed, 24 out of 28, expects the government to cut its long-held inflation goal from the current 4.5 percent in June, when the 2019 target is due to be announced.

That compares with an exclusive January poll that had 12 out of 20 economists predicting a target cut.

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Investors have also raised their bets on a lower target. Break-even rates, the spread of yields on fixed-rate and inflation-linked government bonds, have fallen below 4.5 percent for the first time since records began in 2009.

"The National Monetary Council will have a great window of opportunity to fix a lower target," said Maurício Molan, chief economist of Banco Santander Brasil SA.

Authorities have refrained from discussing the target publicly because cutting it should limit the room for interest rate cuts needed to lift Brazil out of its worst recession ever.

However, economists said a stronger commitment to low inflation could boost Brazil's long-term growth prospects by reducing investors' uncertainty.

The mere discussion of a lower target marks a striking change for policymakers that spent much of the past few years aggressively raising interest rates to the highest levels among major world economies as inflation shot above 10 percent.

COMING IN LINE WITH PEERS

Most of the economists expecting a cut, 14 out of 24, predict it to be mostly symbolic, to 4.25 percent. Nine forecast the target to be reduced to 4 percent, and one economist expects the goal to be cut to 3.5 percent.

A small reduction would have little practical consequences for monetary policy but could still boost market confidence.

Central bank chief Ilan Goldfajn has said Brazil should aim for a target more in line with other emerging markets. Neighboring Latin American countries such as Mexico and Chile target inflation at 3 percent.

A source last year told Reuters the government had already considered a reduction by then, but ultimately ruled it out as the economy was weak and inflation high. The economy is expected to start recovering this year and inflation is set to fall below 4.5 percent in the second quarter.

Economists who expect the target to be maintained noted that 2019 will be the first year of the next president's term, which raises uncertainty for that year that could stoke inflation.

A poll this week showed an increase in the popularity of leftist former president Luiz Inacio Lula da Silva and of right-wing politician Jair Bolsonaro, an apologist for Brazil's 1965-1984 dictatorship, ahead of the 2018 elections.

"If the government sets a new inflation target and gets surprised (by higher inflation) ... the central bank will lose credibility," economists with asset management firm Mapfre Investimentos said.

Brazil began targeting inflation in 1999. The current 4.5 percent goal was first adopted for 2005, originally with a tolerance margin of plus or minus 2.5 percentage points. In 2015, the government narrowed the range to plus or minus 1.5 percentage points.

(Reporting by Silvio Cascione; Editing by Meredith Mazzilli)