Brazil inflation fight not over, faces serious recession risk -central bankers

(Reuters) -Brazil’s battle against inflation is not over and the country is at serious risk of recession if it does not adopt a clear fiscal anchor, central bank chief Roberto Campos Neto and former Finance Minister Henrique Meirelles said on Tuesday.

“Although much of the recent improvement in inflation is due to government measures, there are incipient indicators that show a qualitative improvement,” Campos Neto told a business conference in New York, adding that it was too early to celebrate the improvement.

“We need to persist in fighting inflation, we need to persist in reaching our targets because this is the best way to contribute to sustainable growth,” he said.

Brazil’s consumer prices rose 6.5% in the 12 months through October, down from a peak of 12% in April.

Campos Neto also said that maintaining fiscal stability was important for social inclusion in Brazil, where President-elect Luiz Inacio Lula da Silva has been criticized for a plan to ramp up social spending.

“Fiscal discipline is directly related to the country’s credibility and there is a turning point where trying harder for the most needy can generate results contrary to what is desired, putting financial stability and job creation at risk,” Campos Neto said.

Investors were spooked last week by Lula’s spending plans and the leftist’s apparent downplaying of the importance of fiscal prudence. Brazilian assets have since recovered.

“We understand that only a cohesive plan, with fiscal coherence and continuity of reforms, will ensure a sustainable growth trajectory with low inflation and low interest rates,” Campos Neto said.

Later at the same event, Meirelles, a former Brazil cenbank chief, said the country would need to approve a waiver for higher spending in 2023, but stressed the approval of a clear fiscal anchor is essential.

“There has to be an anchor, there has to be a spending cap, the limit has to be clear because otherwise the country faces the serious risk of returning to an environment of recession,” said Meirelles.

Last week, in comments that spooked markets, Meirelles said he was worried about the economy under Lula.

“I’m pessimistic, no doubt,” he said in leaked comments to the media. “I can only say one thing to all of you: good luck.”

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