Central Bank offers an olive branch to the government

The Brazilian Central Bank on Tuesday published the minutes of its latest monetary policy meeting. And despite the complaints made by President Luiz Inácio Lula da Silva with regard to the bank’s monetary policy decisions, the institution decided to extend an olive branch to the government by recognizing that the fiscal measures announced by the Finance Ministry could indeed help reduce the risk of new inflation bumps.

In mid-January, Finance Minister Fernando Haddad announced his first plan to reduce the public deficit, which included a new debt refinancing program, efforts to reduce federal spending, and the fine-tuning of mechanisms capable of stemming revenue losses. A few days later, he also promised to present a new fiscal framework to replace Brazil’s current spending cap by April. 

The bank’s Monetary Policy Committee said that “the implementation of the proposed fiscal package could reduce the upside inflation risk.” It noted, however, that “it will be important to monitor the challenges” in the implementation of these measures.

While these measures somewhat reassured the market, Lula’s words have sparked uncertainty and a deterioration of economic expectations. Market agents surveyed weekly by the Central Bank have consistently worsened their inflation forecasts for this year and the next.

In Tuesday’s minutes, the Monetary Policy Committee adopted a milder tone than in its communiqué from last Wednesday, when it kept the benchmark interest rate Selic at 13.75 percent. On Monday, Lula called the move “shameful” and once again questioned the bank’s formal autonomy from political interference, in place since 2021.

Mr. Haddad described the minutes as “analytical” and “friendly.”

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