Thus, monetary policy should respond immediately in order to avoid that initially restricted inflation pressures translate into an enduring deterioration in inflation expectations. Recent decisions of the Brazilian Central Bank should be understood in that context. Their effects over activity and inflation – potentially helped by some liquidity tightening in progress since the first months of the year – are cumulative and will undoubtedly produce effects in the coming quarters. International evidence, as well as the Brazilian experience under inflation-targeting, shows that there are no advantages of sustaining high inflation rates for long periods. On the contrary, high inflation rates lead to higher risk premia, to shorter planning horizons and consequently to lower potential growth of the economy. Its most harmful outcome is the deterioration in income distribution, as low-income brackets are harder hit by the negative effect of inflation on their purchasing power. It is now clearer than ever that fighting inflation generates benefits in terms of decreasing poverty and reducing social inequalities. Thus, the Brazilian Central Bank has acted and will continue to act in order to bring inflation back to the midpoint target of 4.5% promptly, that is, during the course of 2009. This stance is designed to avoid the consolidation of a negative inflationary environment, in which monetary policy would lose efficiency. It should be clear to the public that the Brazilian Central Bank will not have a complacent approach regarding inflation. The Bank is committed to act in order to bring inflation to the midpoint target during 2009.
This is the approach that minimizes costs for economic activity and for the society at large, contributing to consolidate a sound, efficient, and fair economic structure. Thanks for your attention! 2  BIS Review 108/2008