Insight: Brazil's Tombini - An inflation hawk, believe it or not

Fri Aug 23, 2013 1:17am EDT
 
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By Walter Brandimarte

RIO DE JANEIRO (Reuters) - Given his checkered record so far, investors could be forgiven for thinking that Brazil's quiet, bespectacled central bank chief Alexandre Tombini is a pushover on inflation.

Since Tombini took the job in early 2011, annual inflation has often hovered above 6 percent, dangerously close to the top of the bank's target range. An unexpected spurt in prices this year scared consumers, smothered the economy and contributed to a wave of massive protests against President Dilma Rousseff's government.

The price instability, particularly sensitive in a country still haunted by 2,500 percent hyperinflation in the 1990s, led to whispers among investors that Tombini was too weak to get the problem under control - or worse - that he allowed Rousseff to pressure him into a 14-month campaign of rate cuts that many say has backfired and undermined the bank's credibility.

But those who know Tombini well - a small group, given his private nature - told Reuters they see the story differently. They say the central bank chief is likely to be more hawkish than most people think, and that he will do whatever he believes necessary in the coming months to recover the confidence of consumers and investors.

They say the recent setbacks resulted not from weakness, but from a kind of betrayal by other parts of the government including the finance ministry, which had tacitly agreed to control spending so that Tombini could keep interest rates low.

Once Tombini realized the pact had been broken - too late, some critics say - the 49-year-old career government technocrat pivoted to the orthodox training he learned two decades ago at the University of Illinois. Tombini started raising interest rates at a rapid pace in April, even as the Brazilian economy remained stuck in a two-year-long rut.

"I believe Tombini realized this: 'I have no help from the fiscal sector, so I'll fulfill my mission (myself)'," said Antonio Delfim Netto, a former finance minister in the 1960s and 70s who retains significant influence with Rousseff and senior members of her economic team.

"I have no doubt he will raise interest rates as much as he sees fit to bring inflation expectations back to 4.5 percent," the midpoint of the bank's price target range, Netto said.   Continued...

 
Brazil's Central Bank President Alexandre Tombini attends a public hearing on the Economic Affairs Committee of the Brazilian Federal Senate in Brasilia December 11, 2012. REUTERS/Ueslei Marcelino