Brazil rules out relaxing inflation target

Under Brazil's inflation-targeting regime, the targets can be raised if the economy is hit by shocks on the supply side in order to allow the central bank to fight inflation over a longer period of time.

But, Meirelles said at a senate hearing, this is not the case now as the current supply side shock is not strong enough to justify a change in the inflation target. In the minutes of the last monetary policy committee (Copom) meeting released earlier today, the central bank said the supply side shock consisted of the impact on the economy of changes introduced to the Cofins (Social security contribution) tax, and the increase of some commodity prices in the international markets.

The minutes said that the economic theory and the best monetary policy practices indicate that an increase in consumer prices is acceptable to accommodate part of a supply shock.

The minutes noted that the Copom decided to raise the inflation target in 2002 and set adjusted inflation targets -- above the official target -- for 2003 and 2004.