Brazil’s Central Bank Chief Warns Fiscal Issues Affect Monetary Policy Transmission, According to Reuters

By Howard Schneider

JACKSON HOLE, Wyoming – The head of Brazil’s central bank expressed on Saturday that navigating discussions around monetary policy transmission is becoming increasingly complex without addressing the country’s fiscal challenges, particularly due to the rising public debt linked to expanded government spending.

Speaking at the Kansas City Federal Reserve’s annual economic conference, Roberto Campos Neto highlighted that income transfer programs initiated during the pandemic have not only expanded but have also become permanent fixtures of the fiscal landscape.

He pointed out that in Brazil, approximately 50 million individuals receive government assistance, compared to 43 million who are either employees or entrepreneurs.

While not explicitly criticizing President Luiz Inacio Lula da Silva’s administration, Campos Neto emphasized the need for a strategic approach to evaluate the effectiveness of government programs, particularly in emerging markets, and the subsequent impact on debt levels. "We need to start communicating better about the misallocation of resources," he stated.

In July, Brazilian policymakers decided to maintain the Selic benchmark interest rate at 10.5% for the second consecutive time but adopted a more cautious tone, underscoring the necessity for "greater caution" and diligent monitoring of inflation-related factors.

The central bank’s meeting minutes indicated close monitoring of recent fiscal developments and their implications for monetary policy, amid concerns that Lula’s leftist government may struggle to eliminate its primary deficit this year and next, as promised under new fiscal regulations related to rising expenditures.

Campos Neto remarked, "Addressing the debt will be crucial as we consider market dynamics going forward. It will be increasingly difficult to discuss monetary policy transmission without delving more into fiscal matters." His term is set to expire in December.

He noted that current market volatility might reflect a diminishing expectation for substantial fiscal and monetary interventions in the future.

Commenting on the slowdown in China, Campos Neto suggested that it could influence Brazil through trade dynamics, affecting import prices for Chinese goods. However, he clarified that the overall impact would depend on the severity of China’s economic deceleration.

This week, central bankers from across the globe gathered in Jackson Hole for what has become a significant international economic event at Grand Teton National Park. Campos Neto participated in a panel that examined the nuances of monetary transmission, which focuses on how fluctuations in interest rates affect economic activity.

His remarks came in the wake of efforts by Brazilian central bank rate-setting members to convey their unity and the consideration of all options for the upcoming policy decision on September 17-18, including a potential rate hike if deemed necessary.

Campos Neto and other directors of the central bank reiterated that future guidance remains uncertain and will be driven by data.

As of July, Brazil’s annual inflation rate stood at 4.5%, straying further from the official target of 3%, which allows for a tolerance of 1.5 percentage points in either direction. Interest rate futures currently suggest over an 80% likelihood of a rate increase next month, which would coincide with the U.S. Federal Reserve’s preparations for monetary easing.