| SAO PAULO, Sept 24
SAO PAULO, Sept 24 Brazilian policymakers will
need to raise interest rates, restrain government spending and
intensify a fight against inflation to avoid a steep currency
drop when the U.S. Federal Reserve tapers off its monetary
stimulus, two prominent Brazilian economics professors said on
Central bank efforts to stem a slump in the Brazilian real
will only work if policymakers keep raising the benchmark
overnight Selic rate into next year, when the Fed is expected to
start removing part of its asset purchase program, said Eliana
Cardoso, a former International Monetary Fund economist who is
now a professor at São Paulo-based Fundação Getulio Vargas.
The real shed 7 percent this year as expectations of tighter
global liquidity conditions forced companies and banks to step
up demand for U.S. dollars. The currency plummeted 18 percent
between April and September, when investor confidence was shaken
by a series of government decisions and a deteriorating current
On Tuesday, the real remained flat at 2.20 to the dollar.
Over the past month, the central bank has relied entirely on
intervention in currency markets aimed at providing companies
and banks with liquidity in U.S. dollars. Cardoso and Eduardo
Giannetti da Fonseca, a professor at Insper business school,
said the success of that strategy depends on the intensity of
the Fed's tapering as well as policy thrift in Brazil.
"This policy will only, in my view, have the desired effects
as long as it is accompanied by higher interest rates," Cardoso
said at an event sponsored by non-profit group IDS. The central
bank raised the Selic four times this year from a record low,
and is now at 9 percent.
The central bank, led by economist Alexandre Tombini, has
embarked in one of the world's most aggressive cycles of rate
hikes this year. This process risks dampening an already slow
recovery in Latin America's largest economy. In the minutes of
its last monetary policy meeting, the bank signaled it might
raise rates again in October but left doubts on whether it will
continue tightening monetary policy after that.
Giannetti da Fonseca, a Cambridge University-trained
economist renowned in Brazil for his works on philosophy and
economics, said is it "unlikely that the government might engage
on further rate increases next year, when we have an election
here." Rousseff is expected to run for re-election.
The economist called Rousseff's economic policy framework
"blurry" called for a more vigorous inflation-fight.
After cutting rates to record lows, the central bank this
year has hiked rates by 175 basis points to counter expectations
for high inflation this year and next.
Although the benchmark IPCA consumer price index has shown
recently some signs of abating, and inflation has lost steam as
a result, data points to a pick up in prices that will likely
keep inflation closer to 6 percent at the end of this year. The
central bank targets inflation of 4.5 percent with a leeway of
plus or minus two percentage points.