December 4, 2022

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Brazil not out of the woods amid fiscal concerns over inflation – central bank governor Reuters

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©Reuters. FILE PHOTO: Brazil’s Central Bank Governor Roberto Campos Neto looks on during a ceremony announcing new measures for the Brasil Empreendedor (Entrepreneurial Brazil) loan program at the Planalto Palace in Brasilia, Brazil May 25, 2022. REUTERS/Adriano Ma

BRASILIA (Reuters) – Brazil is not out of the woods on inflation and policymakers still see work to be done, central bank governor Roberto Campos Neto said on Friday, signaling that fiscal deterioration could force a change in monetary policy.

His remarks, made at an event hosted by Bloomberg, sought again to voice concerns about the significant increase in spending planned by the government of left-wing President-elect Luiz Inacio Lula da Silva, who takes office on January 1.

While acknowledging that it remains to be seen what spending package would actually be approved by Congress, he stressed that the central bank’s stance could change depending on the scenario.

“It is very important to have coordination between fiscal and monetary policy at this stage of the cycle,” he said, stressing that fiscal concerns have already influenced market expectations for monetary easing.

“Fiscal policy is an input for us, and if we believe that this input will not achieve the (inflationary) convergence that we are planning, then we will react.”

The central bank paused its aggressive monetary tightening in September after 12 straight hikes that lifted interest rates to 13.75% from a record low of 2% in March 2021, and warned it could resume hikes if disinflation fails expected to occur.

After Lula downplayed the markets’ negative reaction to his proposal to exempt nearly 200 billion reais ($37 billion) in spending from a constitutional budget ceiling, Campos Neto explained that the market is not a monster, but “a machine that… allocates resources”.

“What keeps me up at night is that sometimes you have a tipping point where you honestly and genuinely want to do more for those who need it, but when you cross that tipping point, trying to do more actually means doing less do,” he said.

Campos Neto said this would cause problems in the pricing mechanism and disorganization in the markets.

($1 = 5.3765 reais)

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