Brazils central bank sees risks from fiscal framework review and stimulus

Brazil's central bank sees risks from fiscal framework review and stimulus

BRASILIA (Reuters) – Brazils central bank has expressed concern at increased inflation expectations, saying that a fiscal framework revision and government stimulus package may lead to upward pressure on consumer prices.

In the minutes of its Jan.31 – Feb.1 meeting, when the rate-setting committee kept the benchmark rate at 13.75%, some committee members noted that the fiscal package presented by the Finance Ministry should mitigate the fiscal risks.

Nonetheless, “it will be important to monitor the challenges for its implementation,” the minutes added.

The central bank said inflation expectations drifting further from official targets over longer horizons was noted “with concern,” highlighting the existence of two fiscal risks that may push inflation upwards.

The first relates to the countrys fiscal framework revision, which “reduces the visibility on public accounts for the coming years, introduces premia on asset prices, and impacts inflation expectations”.

In an environment of a narrowed output gap, the impact on inflation of government fiscal stimuli tends to outweigh the desired impact on economic activity, they added.

The messages come amid intense criticism from President Luiz Inacio Lula da Silva, who has repeatedly portrayed the level of basic interest rates as a villain for the economy.

The central bank, which paused its aggressive monetary policy cycle in September after 12 consecutive hikes, had already stated that it was considering holding interest rates at a six-year high, longer than markets expect, due to fiscal risks under Lula.

Finance Minister Fernando Haddad has adopted a more conciliatory tone, but has expressed hope for a “more generous” communication from the central bank regarding the governments fiscal measures.

Despite Haddad‘s measures to reduce this year’s primary budget deficit, markets remain skeptical of their viability as they await a new fiscal rule to prevent rampant growth in public debt after leftist Lula secured Congress approval for a strong spending package that bypasses the constitutional spending cap to meet campaign promises.