On Friday, Brazil’s central bank chief, Roberto Campos Neto, stated that inflation expectations are not linked with official targets and that they may not be anchored if the government’s budgetary targets do not coincide.
He described the scenario as a “twin unanchoring” that must be handled during an event organized by asset management 1618 Investimentos.
On the one hand, the market does not anticipate the central bank will achieve its 3% inflation objective in the next few years. On the other side, it forecasts a primary deficit of 0.8% of GDP in 2024, with the government aiming to eradicate it by next year, according to Campos Neto.
“There is a relationship between these two unanchorings. In other words, you need to anchor the monetary and anchor the fiscal. Doing one without doing the other is very difficult, can be costly and may not be achieved,” he noted.
While acknowledging that consumer prices in Brazil have improved, he noted that inflation measurements remain over the center of the objective, and inflation expectations are higher than the official targets.
“We have work to do,” he remarked.
President Luiz Inacio Lula da Silva’s government would need to generate revenues “a lot” to fulfill the fiscal target as planned, according to Campos Neto, who predicts that fiscal expectations will improve as revenue-increasing tax measures pass through Congress.
Brazil’s central bank began an easing cycle in August and dropped the benchmark interest rate by 50 basis points last week to 12.75%. Prior to then, officials had maintained interest rates stable for about a year in order to battle inflation.