Brazil c.bank sees widespread inflation-report

Sun May 25, 2008 11:42am EDT
SAO PAULO, May 25 (Reuters) - Inflation in Brazil has become more widespread because of a surge in consumer demand, central bank President Henrique Meirelles told the official government news service over the weekend, adding that the bank will take "all measures necessary" to keep prices in check.
"There is, indeed, food inflation, but it's not just food inflation," Meirelles said in an interview with the Agencia Brasil government news service. "We have today inflation that is much more widespread.
"We have inflation of primary materials, metals and non-metals, chemical products, oil and very heated activity that brings about inflation in the services area."
Meirelles said that because of hot demand in the economy, there is greater risk of a pass-through to consumer prices from a recent surge in wholesale inflation.
Inflation as measured by the wholesale-heavy IGP-M index jumped 9.81 percent in the 12 months to April, compared with a 5.04 percent rise in the same period for the benchmark IPCA consumer price index that the central bank uses to set interest rates. The bank has an inflation target of 4.5 percent for 2008 and 2009.
"That's exactly why the central bank has already said it will take all measures necessary and as a consequence, the outlook for inflation has been anchored around the target," he said. "The nation can stay calm that the central bank will keep inflation at the target."
Meirelles said the central bank works much like someone shooting in a target practice: the bank always sets its benchmark interest rate aiming at the target of 4.5 percent for inflation, but it may need to be more or less aggressive depending on the effects of rates on inflation and activity.
"After the shot is fired there may be a strong wind that deviates the bullet a bit, but the next shot will be fired again aiming at the bull's eye," he said.
The central bank's strategy to increase foreign currency reserves has helped Brazil weather recent market turmoil caused by the slump in U.S. credit markets and Meirelles does not expect changes on that strategy because of plans by the finance ministry to launch a sovereign wealth fund.
The ministry has said money for the fund will come mainly from extra fiscal tightening, but it may also buy dollars in the spot currency market, which may ease the appreciation of the national currency, the real BRBY.
"The central bank at no point wishes to be the only player in the market. It's normal that there are several buyers (for dollars)," Meirelles said. "Indeed, in other countries, the treasury buys directly from the market to meet its obligations, including the possible creation of the sovereign fund."
The bank has no plans to raise reserve requirements on bank demand, time and savings deposits in a bid to cool down the economy, Meirelles said. Some economists have argued higher reserve requirements would reduce available credit in the economy as banks would have to set more money aside at the central bank.
"Brazil has high reserve requirements in international terms," Meirelles said. "It's much higher than the average and the highest levels practiced in other countries." (Reporting by Elzio Barreto, editing by Maureen Bavdek)