Roberto Campos Neto, the head of Brazil’s central bank, expressed concerns on Friday about the country’s inflation expectations not aligning with official targets. He pointed out that if the government’s fiscal goals aren’t met, these expectations may become unmoored.
During an event hosted by asset manager 1618 Investimentos, Campos Neto referred to this situation as a “twin unanchoring” that needs attention.
On one side, the market lacks confidence that the central bank can bring inflation down to the 3% target in the coming years. On the other side, the market foresees a 2024 primary deficit of 0.8% of the gross domestic product (GDP), while the government aims to eliminate it by next year, Campos Neto noted.
“There’s a connection between these two situations of unanchoring. In simpler terms, you need to stabilize both the monetary and fiscal aspects. Trying to fix one without addressing the other is a tough and potentially expensive task that might not succeed,” he explained.
Although he recognized some progress in controlling consumer prices in Brazil, he noted that inflation numbers are still higher than the desired target. Additionally, people’s expectations about future inflation are greater than what the government aims for.
“We’ve got some work ahead of us,” he remarked.
Campos Neto highlighted the need for President Luiz Inacio Lula da Silva’s government to significantly boost its income to meet the fiscal target as originally intended. He anticipates that fiscal expectations will improve as tax measures aimed at increasing revenue make their way through Congress.
Brazil’s central bank began reducing interest rates in August. Just last week, they lowered the benchmark interest rate by another 50 basis points to 12.75%. Before this, policymakers had maintained the rates unchanged for nearly a year as part of their strategy to address inflation.
