Brazil budget cuts seen as solid inflation remedy

* Brazil central bank carries out poll on spending

* Poll shows cuts could curb inflation more effectively

* Survey comes as president-elect vows fiscal discipline

By Ana Nicolaci da Costa and Isabel Versiani

BRASILIA, Nov 8 (BestGrowthStock) – Spending cuts could be a more
effective way to bring down inflation in Brazil than monetary
tightening, a central bank survey conducted with investors
showed on Monday.

A reduction in public sector spending equivalent to 1
percent of gross domestic product over 12 months would help
bring inflation down, allowing the benchmark Selic interest
rate to fall 100 basis points from 10.75 percent (BRCBMP=ECI: )
currently, the survey showed.

“The aim is to reduce a mismatch in information between
market participants as well as between them and the central
bank,” the bank said in a statement.

The survey comes as investors are looking for reassurances
that president-elect Dilma Rousseff will rein in spending once
she takes office in 2011 in order to achieve lower long-term
interest rates, helping to ease pressure on a strong currency.

Rousseff has said she would keep government spending under
control but ruled out austere budget cuts. In her first remarks
as president-elect, on Oct. 31, she was quick to reiterate her
commitment to prudent fiscal spending.

The survey — the first of its kind — also highlights a
growing discrepancy between the central bank’s benign inflation
outlook and building inflation expectations among market
participants.

A tightening equivalent to 1 percent of gross domestic
product in a period of 12 months would shave 0.32 percentage
points off the benchmark IPCA consumer price index, according
to the median of the 64 financial institutions polled.

Such a tightening in the fiscal accounts would be more
effective than a 100-basis-point rise in lending rates over the
same period which would only reduce inflation by 0.25
percentage points, the survey said.

Finance Minister Guido Mantega recently said it does not
make sense to link tighter fiscal policy to lower interest
rates. But the central bank said in its latest inflation report
that the expected recovery of the country’s fiscal accounts
next year would help contain inflation pressures.

Brazil’s budget balance deteriorated rapidly in this
election year, with the 12-month primary budget surplus figure
remaining below the 3.3 percent government target in September,
even with massive one-off incomes being booked that month.

The idea is that more controlled spending would take away
some of the stimulus fueling the country’s high growth rates in
the first half of the year, while also also opening the way for
higher savings and a lower neutral rate.

The neutral rate is the level at which the lending rate
neither stimulates nor curbs demand in an economy.
(Editing by James Dalgleish)

Brazil budget cuts seen as solid inflation remedy