SAO PAULO -(Dow Jones)- Interest rate cuts by the Brazilian Central Bank will be more moderate than analysts are currently predicting, underpinning continued strength for Brazil's currency, the real, according to economist and former finance ministry official Bernard Appy.
"Brazil's Selic base interest rate is likely to decline to 9.5% by April, then remain stable through the end of the year," said Appy, a partner in Sao Paulo's LCA consulting group and a former deputy finance minister. "There are still inflationary pressures ahead."
The base rate is currently 10.5%, down from a 2011 peak of 12.5%. Like Appy, most analysts are expecting a half-point cut in March and a similar cut in April. But many are predicting continued cuts through 2012, with the base rate falling to as low as 8.0%.
"Not likely," Appy told Dow Jones Newswires in an interview. "Inflation pressures are still present, for both 2012 and, just as important, 2013."
These include fuel prices, tightly controlled by the government but now out- of-sync with rising international prices, and price pressures from food commodities next year.
LCA is predicting 5.1% inflation in 2012 and 4.9% in 2013, in both cases below the 6.5% registered last year but still above the government's long-sought goal of 4.5%.
Continued high interest rates, however, will have the unwanted effect of supporting the Brazilian real against the U.S. dollar. The real is currently trading at about BRL1.70 to the dollar, representing a 10% appreciation so far in 2012.
"The real's strength is due to a combination of attractive domestic interest rates and the absurdly high level of international financial market liquidity," said Appy.
Extremely low interest rates in the U.S., Europe and other markets have led to heavy foreign investment inflows in Brazil, pumping up the Brazilian currency, he said.
Appy said the real could slip out of its recent narrow range and strengthen to BRL1.65-to-the-dollar by the end of 2012.
There is little Brazil's government can do to stem the unwanted appreciation. "Capital controls don't work very well," Appy said. "Market participants find ways to get around them."
The former official added, "At BRL1.70-to-the-dollar, Brazilian industry is still broadly competitive, but some segments are hurting. Brazil, at this level, suffers a marginal de-industrialization. A stronger real would hurt that much more."
LCA sees only moderate economic growth for Brazil in 2012 at 3.3%, slightly above the estimated 2011 expansion of about 3.0%.
Appy said Brazil's government, including the central bank, will use "all the tools at its disposal," not just monetary policy, to promote economic growth without rekindling inflation.
He added, "The art of creating economic equilibrium lies in calibrating the relative costs and benefits in using each policy tool."
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"Brazil's Selic base interest rate is likely to decline to 9.5% by April, then remain stable through the end of the year," said Appy, a partner in Sao Paulo's LCA consulting group and a former deputy finance minister. "There are still inflationary pressures ahead."
The base rate is currently 10.5%, down from a 2011 peak of 12.5%. Like Appy, most analysts are expecting a half-point cut in March and a similar cut in April. But many are predicting continued cuts through 2012, with the base rate falling to as low as 8.0%.
"Not likely," Appy told Dow Jones Newswires in an interview. "Inflation pressures are still present, for both 2012 and, just as important, 2013."
These include fuel prices, tightly controlled by the government but now out- of-sync with rising international prices, and price pressures from food commodities next year.
LCA is predicting 5.1% inflation in 2012 and 4.9% in 2013, in both cases below the 6.5% registered last year but still above the government's long-sought goal of 4.5%.
Continued high interest rates, however, will have the unwanted effect of supporting the Brazilian real against the U.S. dollar. The real is currently trading at about BRL1.70 to the dollar, representing a 10% appreciation so far in 2012.
"The real's strength is due to a combination of attractive domestic interest rates and the absurdly high level of international financial market liquidity," said Appy.
Extremely low interest rates in the U.S., Europe and other markets have led to heavy foreign investment inflows in Brazil, pumping up the Brazilian currency, he said.
Appy said the real could slip out of its recent narrow range and strengthen to BRL1.65-to-the-dollar by the end of 2012.
There is little Brazil's government can do to stem the unwanted appreciation. "Capital controls don't work very well," Appy said. "Market participants find ways to get around them."
The former official added, "At BRL1.70-to-the-dollar, Brazilian industry is still broadly competitive, but some segments are hurting. Brazil, at this level, suffers a marginal de-industrialization. A stronger real would hurt that much more."
LCA sees only moderate economic growth for Brazil in 2012 at 3.3%, slightly above the estimated 2011 expansion of about 3.0%.
Appy said Brazil's government, including the central bank, will use "all the tools at its disposal," not just monetary policy, to promote economic growth without rekindling inflation.
He added, "The art of creating economic equilibrium lies in calibrating the relative costs and benefits in using each policy tool."
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