São Paulo, July 29, 2003 (Agência Brasil - ABr) - The president of the Central Bank (BC), Henrique Meirelles, reacted, yesterday (28), to criticisms that the Monetary Policy Committee (Copom) adopted a conservative stance when it decided to reduce the prime interest rate (Selic) only 1.5%, from 26% to 24.5%. In a speech before an audience made up of executives and entrepreneurs from the real estate sector, at the headquarters of the Secovi, the Housing Syndicate, Meirelles argued that "it was precisely monetary policy that made it possible to defuse the risk of uncontrolled inflation that menaced the country at the turn of the year. This is a conquest that is being consolidated."

He stressed that "many accused the Central Bank of behaving asymmetrically: of acting without hesitation when it comes to raising interest rates and acting too timidly when it comes time to lower them. Nothing could be more wrong. The Central Bank has no more ease in raising rates than in lowering them. The Central Bank is, indeed, committed to making correct decisions aimed at convergence with the targets for inflation, not to seeking applause in the short run."

According to Meirelles, the response to a shock "that has a pronounced and sudden impact on economic equilibrium should be strong and decisive." He continued by saying that "if the shock tends to drive inflation up, then the correct response is a rapid increase in interest rates, followed by a relatively slower reduction. By the same token, the correct response to an unexpected shock that threatens to lower the inflation rate excessively in terms of the objectives of monetary policy would be a rapid decrease in interest rates, that would only go back up, gradually."

Meirelles refused to go any deeper in assessing the tendency at the next meeting of the Copom, scheduled for August 19-20; he justified himself by saying that the minutes of the last meeting will only be made public on Thursday and, obviously, any prognosis on his part would provoke market turbulence. But he assured that the instruments of monetary policy are turned towards a gradual reduction of Brazil's country risk premium.

When asked by one of the participants in the meeting whether the reduction in compulsory deposits and approval of the bankruptcy and composition law are sufficient to lower bank spreads, he affirmed that the two elements are necessary but not sufficient. (DAS)