CAMPOS DO JORDÃO, Brazil, Aug 30 (Reuters) - Brazil's central bank, grappling with stubborn inflation, a red-hot labor market and rampant government spending, is likely to keep raising borrowing costs for a "reasonably long" period of time, a senior banker at Grupo BTG Pactual SA said on Friday.
Pérsio Arida, a managing partner at São Paulo-based BTG Pactual, the country's largest independent investment bank, said the Brazilian economy is struggling with symptoms of what he called an "overheated economy" - low unemployment rates that trigger abnormally high inflation, low productivity growth and an asymmetric expansion in credit.
The central bank is dealing with that by increasing the benchmark Selic overnight rate in the absence of government spending discipline, Arida, himself a former central bank president, said at an event sponsored by BM&FBovespa SA . Central bank policymakers raised the Selic for a fourth straight time to 9 percent on Wednesday to bring down inflation, which is near the ceiling of the official target.
"This contractionary stance at the central bank will continue for a reasonably long period of time," Arida told an audience in the Brazilian resort of Campos do Jordão. "The perception that inflation is out of sync is sadly making the work of policymakers much more difficult."
Arida's remarks underscore growing concerns over the impact of President Dilma Rousseff's policies which, paradoxically, aimed at jump-starting growth and lowering interest rates in Brazil. Economists at the BM&FBovespa event said that instead of meeting those goals, Rousseff's policies - such as extending subsidized credit, hiking wages above inflation and endorsing a weaker currency - are having the opposite effect.
The impact of a tumble in the real, Brazil's currency, in recent months has yet to be felt, Arida said, without elaborating. In fact, he noted, the need to stem the impact of the real's 13 percent drop this year could lead the central bank to lift rates further.
Alexandre Schwartsman, a former member of the central bank's board, said changes in the level of interest rates could impact the currency, but in the absence of tighter fiscal policy those rate hikes might be ineffective to weigh down inflation.
Investors have interpreted the central bank's active intervention in the currency market to limit the real's slump and its newfound vigor to fight inflation as a way to restore credibility. Although good for the country, it probably took too long for policymakers to adjust their policies, economists at the BM&FBovespa event added.
A measure of the central bank's policy credibility constructed by Rio de Janeiro-based Galanto Consultoria research firm tumbled to less than 10 percent last month from a peak of over 90 percent in 2007. The gauge is built using the number of participants in a weekly central bank survey whose inflation rate predictions match those of the monetary authority.
Yields on interest rate futures contracts and the currency jumped on Friday after data showed economic growth beat expectations in the second quarter. The real gained 0.4 percent to 2.35 to the dollar, while the yield on the rate futures contract due in January 2014 rose 2 basis points to 9.25 percent.
The government said on Friday that Brazil's gross domestic product expanded 1.5 percent in the second quarter from the prior three months. Although the number came above the 0.9 percent forecast in a Thomson Reuters poll, some investors such as Mauá Sekular Investimentos' Luiz Fernando Figueiredo questioned the sustainability of the numbers.
Arida pointed out that a recent surge in domestic debt yields was brought about by "expectations of a normalization of monetary policy conditions in the United States." The problem is, he added, the actual policy tightening in the U.S. has yet to happen.