By Marcela Ayres
(Reuters) – Brazil’s central bank chief, Roberto Campos Neto, said on Monday that monetary policy is being driven to some extent by fiscal policy as risk premiums on long-term interest rates rise amid fears over the country’s debt trajectory.
“I don’t think Brazil’s fiscal reality is an imminent disaster,” he said at an event in Sao Paulo hosted by Consulting House, adding, “We can make course corrections.”
He said Brazil has “many tools and ample capacity to deliver a positive fiscal shock and turn things around,” but added that the timing of announcements was “super relevant.”
The government of leftist president Luiz Inacio Lula da Silva has signaled that it plans new fiscal measures to support the fiscal framework introduced last year.
Fears that rapidly rising mandatory expenditures could render the new framework unsustainable in the short term have injected volatility into local markets.
Finance Minister Fernando Haddad had indicated that these measures could be announced last week, but the delay has kept markets in suspense, fueling uncertainty that has driven long-term interest rates higher, and weakened Brazil’s currency, the real.
Campos Neto said a positive fiscal shock would have a significant impact on markets if it changed the outlook for Brazil’s public debt trajectory.
He also said there was a perception of some softening in economic activity, but no strong evidence to support it.
Policymakers highlighted the stronger-than-expected performance of Latin America’s largest economy as a key factor in their decision to launch a tightening cycle in September, even as advanced economies have been shifting to monetary easing.
In the minutes of the central bank’s latest policy meeting, when it raised rates by 50 basis points to 11.25%, it noted early signs of moderation in indicators such as trade and earnings. However, policymakers stressed this did not signal a turning point in the labor market or economic growth.