World economy less disinflationary for Brazil-senior official

Fri Apr 5, 2013 1:30pm EDT

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SAO PAULO, April 5 (Reuters) - A recent improvement in the world economy means the global environment has become less "disinflationary," a senior Brazilian government official said, in a sign the country was losing a key prop in its fight against inflation.

Global disinflation, or a decrease in the rate of inflation, has helped the Brazilian central bank lower its benchmark Selic rate to an all-time low of 7.25 percent, and keep it there for the past six months even as domestic price rises have picked up.

But the worst may be over for the world economy as U.S. economic activity has shown signs of recovery and a financial collapse in Cyprus was avoided, said the official, a senior member on President Dilma Rousseff's economic team.

"The world (economy) hasn't found an equilibrium yet, but the external environment was more disinflationary before," the source told Reuters late Thursday on condition of anonymity.

Brazil's central bank cited "lingering uncertainties of external and internal origin" when it said on March 14 that it would be cautious about its future monetary policy steps.

Those comments, released in minutes of the bank's last monetary policy meeting, fueled bets that a possible Selic hike was not imminent.

Since then, however, the central bank increased its inflation forecasts closer to the ceiling of an official target range of 2.5-6.5 percent. It also warned there was a 25 percent possibility that inflation will pierce that ceiling this year.

Investors now believe Brazil is about to begin a new monetary tightening cycle, most likely in May.

CURRENCY WAR

Brazil is unlikely to be a victim in a possible resurgence of the global currency war caused by Japan's decision to inject a record $1.5 trillion in its economy over the next two years, according to the official.

"Brazil is well protected, it has already taken measures" against unwanted dollar inflows," the official said, noting the country was no longer a major destination for speculative capital.

The official was also pleased with Brazil's current exchange rate , which has been hovering around the mark of 2 reais per dollar for the past several weeks due to constant central bank intervention.

"The exchange rate is fine where it is," the official said.

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