BRASILIA (Reuters) -Brazil is not out of the woods on inflation and policymakers still see work to be done, said central bank chief Roberto Campos Neto on Friday, signaling that fiscal deterioration could force a monetary policy shift.
His remarks, made at an event hosted by Bloomberg, again sought to reflect concerns with the significant increase in spending planned by the government of leftist President-elect Luiz Inacio Lula da Silva, who takes office on January 1.
Despite acknowledging it was necessary to wait for which spending package would be effectively approved by Congress, he stressed that, depending on the scenario, the central bank’s stance might change.
“It is very important to have coordination between fiscal and monetary policies at this stage of the cycle,” he said, highlighting that fiscal concerns have already affected market expectations for monetary easing.
“The fiscal policy is an input for us, and if through this input we believe that the (inflation) convergence that we had planned won’t be achieved, then we will react.”
The central bank paused its aggressive monetary tightening in September after 12 consecutive increases that lifted interest rates to 13.75% from a 2% record low in March 2021, warning it could resume hikes if disinflation did not happen as expected.
After Lula downplayed markets’ adverse reaction to his proposal to exempt nearly 200 billion reais ($37 billion) of expenditures from a constitutional budget cap, Campos Neto stated that the market was not some monster but “a machine that allocates resources.”
“What keeps me up at night is that sometimes you have an inflection point in which you honestly and truly want to do more for those who need, but when you pass that inflection point, trying to do more actually means doing less,” he said.
Campos Neto said this would lead to problems in the pricing mechanism and disorganization in the markets.
($1 = 5.3765 reais)
(Reporting by Marcela Ayres; Editing by Steven Grattan and Jonathan Oatis)