Brazil’s Goldfajn confronts tough balancing act

Bloomberg

When Ilan Goldfajn presides over his first policy meeting as Brazil’s central bank chief, he’ll have a daunting task: reviving an economy mired in its worst recession in a more than a century while restoring the bank’s inflation-fighting bona fides.
Traders and analysts — who expect the central bank to keep interest rates unchanged at a 10-year high of 14.25 percent — will be paying close attention to the bank’s statement for a read on Goldfajn’s plan of action. To Goldman Sachs Group Inc.’s Alberto Ramos, Goldfajn must make clear his commitment to quash inflation, which has long plagued Latin America’s biggest economy.
“The most important contribution that the central bank can make to the economy is delivering low and stable inflation,” said Ramos, Goldman Sachs’s chief Latin America economist.
At 8.84 percent, Brazil’s inflation rate is almost twice as high as the central bank’s target. Goldfajn’s predecessor, Alexandre Tombini, failed to slow price increases to the bank’s 4.5 percent goal during his five-and-a-half-year tenure. Confidence in the bank was further eroded after it cut its key Selic rate to a record low in 2012, spurring speculation it bowed to government pressure to prioritize economic growth over stemming inflation.
As part of Goldfajn’s effort to rebuild the central bank’s credibility, he has added four new directors to its nine-member board.
Still, the former chief economist of Itau Unibanco Holding SA won’t have the luxury of focusing exclusively on taming price increases as the recession drags on. Acting President Michel Temer said last month that he would “hope” a rate cut could happen at some point. Easing may not come soon, as rate-swaps traders are betting Goldfajn will refrain from cuts until October.
Bond investors are giving Goldfajn and new Finance Minister Henrique Meirelles the benefit of the doubt when it comes to inflation. The two-year break-even rate, a bond-market gauge of investors’ expectations for living expenses, has dropped 43 basis points since June 7, when the Senate approved the central bank chief’s nomination.
Goldman Sachs’s Ramos has dubbed the Goldfajn-Meirelles combination a dream team. Temer appointed the two in May.
“The economic team is still experiencing a honeymoon with investors,” said Andre Perfeito, chief economist at Sao Paulo-based brokerage Gradual Cctvm.