By Luciana Otoni
BRASILIA, Dec 10 (Reuters) - 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 election.
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 course.
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.
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 tightening cycles.
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.