Fernando Haddad, Brazil’s finance minister, and Diogo Guillen, the Central Bank’s director of economic policy, offered contrasting views on the country’s fiscal policy at an event hosted by investment bank Itaú BBA in São Paulo this week.
Mr. Guillen expressed concern about a de-anchoring of inflation expectations, which the Central Bank’s analytical models have flagged. “The discussion of fiscal targets is essential to stabilize market expectations, as was the definition of inflation targets in the first semester,” he said.
The Central Bank director stressed that “having a target and showing on a day-to-day basis that the target is being pursued” are equally important.
Later the same day, the finance minister said that the fiscal target “does not need to be codified in law” to be pursued.
His words come as some of his colleagues — under the auspices of President Luiz Inácio Lula da Silva — have defended looser deficit targets for 2024. They are defending a deficit target of 0.5 percent of GDP, down from the zero deficit target set by the government itself in the new fiscal framework approved earlier this year.
A lone defender of the original target, Mr. Haddad has all but lost this battle, as members of the Workers’ Party don’t want to turn off the spending spigot just before municipal elections in 2024.
On Tuesday, the Central Bank’s Monetary Policy Committee published the minutes of last week’s meeting, when it cut the Selic policy rate to 12.25 percent. In them, the authority warned that a “lack of commitment to fiscal discipline” would have “harmful impacts on the power of monetary policy” and raise the neutral interest rate — the rate at which monetary policy is neither stimulating nor restricting economic growth.
In this current scenario, the minutes indicate that the pace of rate cuts will slow down next year, which for some analysts means that the Selic would still be in double digits by the end of 2024.
New inflation data released today by the IBGE shows that core prices rose in October, but the overall index increased below market expectations, at 0.24 percent over September. In 12 months, inflation stands at 4.82 percent, down from September levels and closer to the government’s target band, which, according to the head economic analyst at Goldman Sachs Latin America, Alberto Ramos, “allows for the continuation of a gradual easing cycle.”
However, factors such as “expansionary fiscal and quasi-fiscal policy” and “still unanchored 2024 and-medium-term inflation expectations” demand caution in the near-term calibration of monetary policy.
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