Brazil’s central bank gave a nod to Finance Minister Fernando Haddad’s efforts to approve a fiscal package to shore up public finances, saying such measures could help reduce upside risks to inflation.
(Bloomberg) — Brazil’s central bank gave a nod to Finance Minister Fernando Haddad’s efforts to approve a fiscal package to shore up public finances, saying such measures could help reduce upside risks to inflation.
“The Committee stresses that the materialization of a scenario with a solid and credible fiscal framework might result in a more benign disinflationary process,” board members wrote in the minutes of their latest policy meeting released on Tuesday.
They added, however, that there is no “mechanical relationship” between slower inflation and the presentation of a new fiscal framework and reinforced that they will monitor the elaboration, discussion and implementation of the package.
And while acknowledging the economic team’s “commitment” to a new fiscal rule, they also elaborated on the reasons why the Selic rate was kept at 13.75% for a fifth straight meeting on March 22. The debate on whether to change inflation targets, they wrote, led investors to bet consumer prices will rise at a faster pace in coming years, derailing the bank’s efforts to anchor such expectations.
Haddad, who called the decision to hold interest rates steady “very concerning” last week, welcomed the tone of the minutes, telling reporters after the release that they signaled the prospect of “harmonization” between Luiz Inacio Lula da Silva’s government and the autonomous monetary authority led by Roberto Campos Neto.
“That’s been our hope all along,” he said.
But Haddad added that fiscal and monetary policy need to work “hand in hand,” saying that “the central bank also has to help us.”
Lula’s government has pushed the bank to lower Brazil’s benchmark interest rate since he took office in January, and Haddad has suggested that the fiscal framework could pave the way for policymakers to begin an easing cycle. The bank has faced political backlash for holding rates at a six-year high even as annual inflation has slowed for 10 consecutive months.
Read More: Lula Slams Brazil’s Central Bank as House Speaker Urges Truce
Swap rates rose as traders delayed bets on the beginning of a monetary easing cycle to August from June. Rates jumped as much as 8 basis points in the contract expiring in January 2024, which indicates investor expectations for the Selic at year-end. Economists continue to forecast rate cuts starting in November.
What Bloomberg Economics Says
“The didactic, respectful tone of the minutes may be designed to counter arguments that the central bank is acting politically. It doesn’t change the bottom line, though — the underlying message was as hawkish as the post-meeting statement. We still don’t expect a rate cut until the third quarter.”
— Adriana Dupita, Brazil and Argentina economist
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In a warning against the possible adoption of subsidized interest rates by Brazil’s development bank BNDES, policymakers wrote that “expansionary parafiscal policies” may boost the neutral rate, which neither stimulates nor depresses the economy, to more than the 4% level currently estimated by the monetary authority.
“The minutes were tougher than their post-meeting statement, and they don’t open space for rate cuts,” said Rafaela Vitoria, an economist with Banco Inter. “Central bankers are focused on inflation estimates which are still unanchored, and the return of subsidies by BNDES would risk a higher Selic for longer, due to loss of power of monetary policy.”
‘Serenity and Patience’
Central bankers gave no indication they’re ready to discuss rate cuts. On the contrary, they reiterated they wouldn’t hesitate to lift borrowing costs if inflation doesn’t behave as expected. They are battling expectations that consumer price increases will remain above target all through 2025.
“Serenity and patience” are needed to incorporate “the inherent delays in the inflation control through interest rates,” they wrote in an unusually didactic document where they also explained why the inflation outlook matters for monetary policy making. “As higher inflation is projected ahead, companies and workers start to incorporate such future inflation in the adjustments of prices and wages,” they said.
Read More: Brazil’s Guillen Says Minutes Explain Slow Disinflation Process.
Haddad recently criticized the central bank’s emphasis on investors’ estimates for consumer price increases, saying they “change all the time.”
Headline inflation is easing at a “slower pace,” with price pressures still driven by excess demand for goods and services, “which therefore requires moderation of economic activity,” policymakers wrote in the minutes.
“Their argument is that every central bank is keeping rates high for longer,” said Juan Prada, a foreign exchange strategist at Barclays.
Central bankers added that they expect an “additional tightening” of credit conditions. While some members of the bank’s board said such tightening is in line with the cycle that lifted the Selic from a historic low of 2%, others said it’s “more intense than expected.” Last week’s decision came in the midst of a banking crisis in the US, where three regional banks collapsed.
Brazil’s central bank “has the appropriate and necessary liquidity instruments linked to macroprudential policy to address localized relevant frictions in the system, should they occur,” policymakers wrote in the minutes.
–With assistance from Josue Leonel.
(Updates with economic team reaction to central bank minutes)
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