By Luciana Otoni
BRASILIA Dec 10 The sooner the U.S. Federal
Reserve starts to scale back its massive economic stimulus, the
smoother the transition will be for the global economy,
Brazilian central bank chief Alexandre Tombini said on Tuesday.
Tombini told Brazilian lawmakers that clearer communication
by the Fed about tapering its $85 billion-a-month in purchases
of Treasuries and mortgage-backed bonds would also help reduce
volatility in global markets.
The specter of heightened volatility stemming from the
tapering is a concern for President Dilma Rousseff, who is
struggling to jump-start economic growth and reduce inflation
with less than a year to go before the next presidential
Earlier this year when the Fed first flagged it could soon
ease back on billions of dollars of stimulus, investors fled en
masse from emerging markets like Brazil. The South American
country saw its currency weaken sharply, raising inflation
pressures by making imports more expensive.
Although many economists expect less market reaction if the
Fed slows its bond purchases in coming months, some fear an
impact on emerging markets if it takes too long to reverse
A majority of economists polled by Reuters expect the Fed to
start trimming its bond-buying program in March, although the
chance of a policy change in December or January has grown.
Tombini said that markets have already priced in a U.S.
stimulus reduction and that any volatility in emerging nations
should "not be confused with fragility."
He reiterated that the central bank will act to reduce
volatility by prolonging its daily currency intervention program
to halt the sharp depreciation of the real. The bank will
detail changes to the program next week, he said.
CURRENCY IS KEY
The U.S.-trained economist signaled last week that the
currency's value going forward will be key for the central bank
in deciding monetary policy.
After raising its benchmark Selic rate for the sixth
straight time to 10 percent in late November, the central bank
has hinted it could slow one of the world's most aggressive
An increase in public spending has kept inflation well above
the official target of 4.5 percent, forcing the central bank to
reverse earlier rate cuts. It has added 275 basis points to the
Selic since April.
Better fiscal results are always positive for central banks,
Tombini said, declining to comment directly on the government's
budget policy, which has been harshly criticized by investors
for its lack of clarity.
The rapid deterioration of Brazil's fiscal accounts plus its
inability to reignite economic growth has raised the odds of a
credit downgrade next year.
Five-year credit default swaps (CDS) on Brazilian government
debt fell nearly 4 basis points to 179 basis
points on Wednesday, meaning that it cost $179,000 per year to
insure exposure to $10 million in debt for a five year period.
That remains well above the $86,000 per year investors pay to
insure their Mexican debt, according to data monitor Markit.