Fiscal developments affect Brazil’s central bank decisions through balance of risks, says director

BRASILIA (Reuters) – Brazilian central bank director Diogo Guillen said on Tuesday that markets are more sensitive to fiscal news and that fiscal developments enter into policymakers’ decisions through the balance of risks for inflation.

Speaking at an event hosted by JP Morgan, Guillen, the economic policy director, said that in the short run, the central bank analyzes how fiscal stimuli will impact activity and how this will translate into more inflation.

In the long term, the focus is on the credibility of the fiscal framework, he added.

His remarks came as the government transition team of President-elect Luiz Inacio Lula da Silva negotiates more budgetary room for welfare expenses in 2023 in a multibillion-dollar waiver from a constitutional spending cap, seen as the country’s main fiscal anchor.

The package has left the market apprehensive amid the lack of commitments regarding public expense control, which could ultimately push Brazil’s debt to record levels and force a monetary policy shift.

Guillen said fiscal policies may impact the Brazilian currency, change expectations and directly affect inflation through expenditures.

Following the central bank decision to pause its aggressive monetary tightening in September after lifting rates to 13.75% from a 2% record-low in March 2021, Guillen acknowledged that “we have a very restrictive monetary policy.”

That suggests that inflation will fall to around the official target despite being still high, he signaled, stressing that the central bank will do whatever is necessary to accomplish that goal.

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