The central bank said it had observed “with concern” that inflation expectations were moving further away from official long-term targets, highlighting the existence of two fiscal risks that could push inflation up.
The first refers to the review of the country’s fiscal framework, which “reduces the visibility of public accounts for the coming years, introduces premiums in asset prices and affects inflation expectations.”
In an environment of narrowing the output gap, the impact on inflation of the government’s fiscal stimuli tends to be greater than desired on economic activity, they added.
The messages come amid intense criticism from President Luiz Inácio Lula da Silva, who has repeatedly portrayed the level of interest rates as a villain for the economy.
The central bank, which interrupted its aggressive monetary policy cycle in September after 12 consecutive hikes, had already said it was considering keeping interest rates at a six-year high, longer than markets expect, due to risks prosecutors under Lula.
Finance Minister Fernando Haddad took a more conciliatory tone but has expressed hope for a communication “more generous” policy of the central bank regarding the government’s fiscal measures.
Despite Haddad’s moves to reduce this year’s primary budget deficit, markets remain skeptical about its feasibility pending a new fiscal rule to prevent runaway growth in public debt, after leftist Lula managed to Congress passes a strong spending package that circumvents the constitutional spending cap to fulfill campaign promises.
Source: Ambito
