BRASILIA (Reuters) - Brazilian President Michel Temer should move ahead with plans to reduce the 2019 inflation goal despite the political crisis that has roiled his government, a member of the administration’s economic team told Reuters on Tuesday.
Corruption allegations against Temer, who could be formally charged by prosecutors in coming weeks, threaten to derail his government’s market-friendly drive, which includes a pension reform and legislation to flexibilize the labor market.
A reduction of the 4.5 percent inflation target for 2019, which was expected before the crisis erupted, could help the government gain market support, said the official who asked for anonymity to speak freely.
“The cost of cutting the target is very low while its gains are high in the eyes of the market,” said the official, adding that he supports a new target of 4 percent.
A two-year recession has dragged down Brazil’s annual inflation rate to its lowest in 10 years in May. Consumer prices as measured by the benchmark IPCA index rose 3.60 percent in the 12 months through May, down from an increase of 4.08 percent in the previous month.
Inflation is expected to end 2017 at 3.71 percent, according to a central bank weekly survey of economists.
The sharp drop has raised calls for a target reduction despite worries that political turmoil could undermine the pension reform needed to cap government spending and keep future inflation at bay.
Another senior economic team member told Reuters last week that the falling inflation rate will be a key factor when the National Monetary Council, the country’s top economic policy body, meets later in June to decide on the 2019 target. The council, which is made up of the finance and planning ministers and central bank chief, is scheduled to meet on June 29.
Eighteen of 29 economists surveyed by Reuters in late May expected the 2019 goal to be reduced, with analysts split over a symbolic cut to 4.25 percent or a more aggressive move to 4.0 or 3.5 percent.
Additional reporting and writing by Alonso Soto; Editing by Tom Brown