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Brazil's President Michel Temer reacts during a ceremony of Sanction of the Law of Revision of the Regulatory Framework of the Broadcasting at the Planalto Palace in Brasilia, Brazil March 28, 2017. REUTERS/Ueslei Marcelino(reuters_tickers)
By Alonso Soto
BRASILIA (Reuters) - Brazil's President Michel Temer wants low inflation to be the legacy of his presidency and aims to cut the official target despite pressure from allies to prioritize growth ahead of elections next year, two close aides told Reuters.
With his government marked by a corruption scandal and an arduous recession, Temer believes his best opportunity to leave a lasting mark is by tackling inflation, said the aides, who asked not to be identified because they are not authorized to speak publicly.
At 4.5 percent with a band of 1.5 percentage points either side, Brazil's inflation target is one of the highest among major economies. Latin America peers Mexico and Chile have a 3 percent target.
Brazil has overshot its target during the last seven years, with the rate reaching double digits in 2015. Yet, with the recession weighing on demand, inflation fell to 4.76 percent in February, its lowest level since 2010.
The target from 2019 onwards is up for revision in June and Temer said in a statement on Monday that his economic team will consider a change.
Opponents of a lower target fear it would risk curbing the central bank's ability to cut rates to stimulate the economy, as that might push inflation above the new goal.
However, Temer's economic team believes a reduction of at least 25 basis points could help the administration gain credibility without undermining the recovery.
High unemployment and contracting output have dragged inflation expectations below target for the first time in years, but officials say the trend must continue before making a decision in June.
"If conditions allow it, the president will change the target," said one aide. "The legacy of a new economic matrix is very important for the president."
Markets jumped after Temer took office last year, following the impeachment of leftist President Dilma Rousseff. While Temer reversed her interventionist policies, he struggled to revive an economy that has contracted nearly 8 percent since 2015.
Political uncertainty, fueled by allegations Temer's top aides are involved in the corruption scandal, has weighed on the economy. Temer is on trial over charges of illegal campaign funding.
Twenty out of 25 economists polled by Reuters last week believe a cut is imminent. Most expect a symbolic move to 4.25 percent, but some called for a reduction to as low as 3.5 percent.
The finance ministry and central bank declined to comment.
PENSION IS KEY
At the heart of Temer's economic plan is a reform to cut ballooning pension spending, which faces stiff resistance in Congress. Temer aides said approval of the reform is a factor in deciding whether to cut the target.
Central bank chief Ilan Goldfajn, an MIT graduate who helped improve the country's inflation-targeting regime set up in 1999, is a strong advocate of a reduction.
Even before becoming central bank governor last year, Goldfajn called for a gradual reduction to 3 percent. He has since privately defended a cut in meetings with other members of the economic team, who were sceptical.
Finance Minister Henrique Meirelles initially believed a lower target could jeopardize a stronger recovery.
The economy is expected to grow just 0.5 percent this year before picking up speed to 2.5 percent in 2018, according to weekly central bank poll of economists.
The inflation slowdown and the creation of a new long-term rate for state-development bank BNDES pegged to market rates has eased Meirelles doubts, a member of the team said.
A decrease in subsidized loans would improve the impact of monetary policy, making it more effective in stimulating growth.
"The decision is not final yet, but resistance to the idea has eased," said the official.
(Reporting by Alonso Soto; Editing by Daniel Flynn and Alistair Bell)