December 11, 2012 / 3:50 PM / 5 years ago

UPDATE 2-Tombini sees Brazil inflation easing despite rebound

4 Min Read

* Central bank chief cites five reasons inflation will fall

* Tombini sees "managed exchange-rate" policy slowing price increases

* Economists, however, forecast elevated inflation this year and next

By Tiago Pariz

BRASILIA, Dec 11 (Reuters) - Inflation in Brazil will slow in 2013 and converge toward the center of a government target range even as the economy gains steam, central bank president Alexandre Tombini said on Tuesday, reinforcing the outlook for stable interest rates.

Tombini outlined five reasons he expected inflation to slow next year, including a more stable exchange rate and a smaller minimum wage increase, in remarks to a congressional hearing in Brasilia.

The central bank's outlook contrasts with most economists, who forecast elevated inflation this year and next as the government increases stimulus to shake the economy out of a nearly two-year slump.

"Growth will recover, although at a slower pace than previously expected, in an environment with inflation under control," Tombini said. He added that the central bank's best strategy now is to hold interest rates for a "prolonged period."

President Dilma Rousseff's government has offered several tax breaks and credit incentives to revive what was one of the world's most dynamic economies before its current downturn. Tombini's central bank has also slashed benchmark interest rates ten straight times to a record low of 7.25 percent.

Many banks such as Barclays, Citigroup and Banco Santander Brasil last week bet that the central bank would need to continue cutting interest rates next year to boost the economy. But Tombini's remarks reinforced the majority view that rates will remain stable through next year.

The central bank targets inflation of 4.5 percent per year, plus or minus 2 percentage points. A central bank survey of about 100 financial institutions on Monday showed a median forecast of 5.58 percent inflation this year and 5.40 percent next year.

The same survey showed Brazil is expected to grow 3.5 percent in 2013, up from a dismal 1.0 percent this year.

In a visit to Paris, Rousseff said Brazil would see accelerating economic growth in coming months due to pro-growth measures taken by her government.

"We're reducing capital cost to create incentives for investments. Since last year, benchmark rates have been reduced -- they were among the highest in the world -- allowing us to reduce the excessive appreciation of our currency."

Currency to Help Inflation

Tombini also suggested that the central bank will intervene to keep its currency, the real, around current levels.

"The exchange rate is more depreciated than it was, but what is important is not the nominal rate but the real rate, which makes a difference in competitiveness," Tombini said.

"It is important that any movement is maintained with inflation under control."

The real has lost about 10 percent so far this year, helping manufacturers who have struggled with high labor costs, clogged roads and ports and a weak global demand.

But when the real weakened sharply to nearly 2.14 per dollar following weak economic data in recent weeks, the central bank stepped in to halt its slide.

The currency was little changed in Tuesday trading, gaining 0.1 percent to 2.0735 per dollar.

Earlier in the day, central bank board member Carlos Hamilton Araujo said at an event in Sao Paulo that Brazil's exchange rate is a "dirty float."

Finance Minister Guido Mantega has used the term to describe a floating exchange rate with occasional government interventions.

Speaking at the same event, Treasury Secretary Arno Augustin said the exchange rate has already achieved a more "realistic" level to support domestic industry.

Tombini also told senators in Brasilia that government efforts to reduce production costs, moderating credit growth and a fragile global economy would contribute to slower inflation next year.

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