(Reuters) - Brazil's President Dilma Rousseff on Wednesday said she will not support policies that attempt to curb inflation by lowering economic growth, but she later wrote in a blog that her comments were misinterpreted after Brazilian interest rate futures fell.
In Durban, South Africa, where she is attending a meeting of BRICS countries, Rousseff told reporters she will not support policies that attempt to curb inflation by slowing down the economy, which she considered as a "recipe to kill the patient without treating the illness."
"I don't agree to policies to fight inflation that look into reducing economic growth," she said in comments broadcast by Brazilian government TV.
"Last year we had low economic growth, but inflation rose because we had a supply shock," she added, suggesting that inflation is the result of a shortage of goods and services in the economy rather than too much demand.
That was one of the arguments recently used by the central bank to justify keeping Brazil's benchmark Selic rate at an all-time low of 7.25 percent even as inflation closed in on 6.5 percent, the ceiling of a government target range.
"There is nothing we can do internally apart from expanding our production to contain an increase in commodities prices caused by a decline in the U.S. (grain) harvest," Rousseff said.
Rousseff said Brazil has moved beyond policies that try to curb prices by lowering economic growth, but assured that the government is closely monitoring inflation.
"We don't believe inflation is out of control. On the contrary, we believe it is under control that what is happening are temporary fluctuations," she said.
Yields on interest-rate futures fell sharply on Brazil's BM&FBovespa exchange after Rousseff's remarks, a sign that investors are less confident the central bank will fight inflation by raising benchmark interest rates.
The market reaction lead Rousseff to explain herself in her official blog. (here)
"That was an inadmissible manipulation of my remarks. Fighting inflation is value in itself in my government and it is permanent," she said in the blog.
Rousseff also asked central bank president Alexandre Tombini to further clarify her remarks, according to the blog. Tombini immediately gave an interview to local news agency Estado, saying the government "has no tolerance to inflation."
Tombini also said that, if necessary, the central bank will make use of its monetary policy tools to control prices.
Despite the concerted government effort to reassure investors it is serious about fighting inflation, interest rate futures closed lower.
Overnight interest-rate futures contracts maturing in January 2014 fell 5 basis points to 7.74 percent, while those maturing in January 2015 dropped 7 basis points to 8.45 percent. The January 2014 is the most-traded on the BM&FBovespa.
Those contracts had been little changed in the past few days as investors awaited a key central bank inflation report on Thursday to reassess their bets on the base Selic rate.
"Any comments from the central bank will have less weight now that you have the perception that the one in charge of economic policy is the Planalto," said Silvio Campos Neto, an economist with Tendencias consultancy, referring to the presidential palace.
Reporting by Walter Brandimarte in Rio de Janeiro, Natália Cacioli in Sao Paulo; editing by Andrew Hay and David Gregorio