UPDATE 2-Brazil central bank head defends inflation policy stance in Davos

Thu Jan 24, 2013 8:44am EST

* Tombini says committed to tackling high inflation

* Expects consumer price inflation down to 4.5 pct by year-end

* Says Brazil has not abandoned economic policy cornerstones

By Guillermo Parra-Bernal

SAO PAULO, Jan 24 (Reuters) - Brazil's central bank is committed to bringing down inflation, its president said, as he defended the government against criticism it had abandoned cornerstones of its economic policy.

Policymakers are not ruling out the use of traditional monetary tools to contain rising consumer prices, central bank President Alexandre Tombini told an audience at the World Economic Forum in Davos, Switzerland late on Wednesday.

Tombini said the central bank is committed to bringing inflation down to 4.5 percent this year. In the 12 months to mid-January, it accelerated to 6.02 percent from 5.78 percent one month before, putting it near the top of the bank's target range of 4.5 percent plus or minus 2 percentage points.

"The central bank remains vigilant and will do what it has to do to handle monetary policy in Brazil. We will control inflation, as has been the case over the past nine years," Tombini said, according to excerpts of a recording of his speech provided by the central bank's press office.

Tombini defended President Dilma Rousseff's administration from criticism that policymakers have abandoned the "macroeconomic tripod" that helped usher in stability and growth during the past decade. The tripod is a combination of policies aimed at preserving a floating foreign exchange regime, budget discipline and low inflation.

Inflation remains "stubborn" in the short run, Tombini said. He said that seasonally, inflation readings are "unfavorable" for the first half of the year. Yet, the convergence of price data to the bank's target will start anytime during the second half of the year.

The central bank signaled on Thursday in the minutes of its last monetary policy meeting that further interest-rate cuts are unlikely because they won't solve the causes of the country's economic slump. Traders said that the message to the market is that inflation remains the bank's top priority.

Yields on the interest rate future contract due in Jan. 2014 jumped to 7.23 percent on Thursday, compared with 7.14 percent at Wednesday's close. The yield on the Jan. 2015 contract also rose to 7.93 percent, about 0.2 percentage points higher than Wednesday's close.

The bank kept rates steady at 7.25 percent on Jan. 16. In the minutes, policymakers said that monetary policy might prove ineffective to fight bottlenecks and shortcomings facing the aggregate supply that are dragging down the economy.

Confidence in Latin America's largest economy has taken a hit in recent months and many investors ran for the exits after Rousseff put pressure on banks, mobile carriers and power utilities to cut prices, the government used accounting gimmicks to meet its annual budget targets and inflation fell down its list of priorities.

In Davos, Tombini said "increases in consumer prices will be controlled" as he argued that inflation hit the mid-point of the central bank's target in nine out of the past 14 years.

Investors have said the government campaign, while well-intentioned, is stirring doubts about Rousseff's willingness to respect contracts and ensure the economy grows in a sustainable way.

Tombini told the audience that "markets in the past erred by being over-optimistic about Brazil and may now be erring again by being too pessimistic about the country."