Central Bank renews concerns about Brazil’s fiscal outlook

The Central Bank of Brazil’s Monetary Policy Council on Tuesday released the minutes of its latest meeting, once again describing a scenario of “gradual slowdown in economic growth” despite the resilience of household consumption, and thus reaffirming its intentions to maintain the monetary easing it began in August last year. 

Since August, the committee has lowered the country’s policy rate by half a percentage point at a time, from 13.75 to 11.25 percent. Further reductions of the same magnitude are expected at upcoming meetings.

The committee also repeated the straightforward and harsher tone of previous minutes when referring to the way the government is conducting fiscal policy, noting a “lack of commitment to structural reforms and fiscal discipline” and reiterating that “the increase of earmarked credit granting and uncertainties about the stabilization of the public debt have the potential to increase the neutral interest rate of the economy.” 

The neutral interest rate, also known as the long-run equilibrium interest rate or the natural rate, is the point at which the monetary policy is neither contractionary nor expansionary and inflation is stable. 

While the Central Bank expects it to be around 4.5 percent above inflation, the median market forecast is 5 percent, meaning most analysts expect the policy rate to end 2024 at 9 percent — as indicated by the latest Focus report, a weekly survey of top-rated investment firms, released today.

According to the fiscal framework approved last year, the government must pursue a zero-deficit budget (with a tolerance margin of a quarter of a percentage point) for 2024, which is considered almost impossible by economists and fiscal authorities.

According to calculations by the Federal Accounts Court, a public spending watchdog, Brazil could post a primary deficit of BRL 55 billion (USD 11 billion) this year instead of meeting its zero-deficit target.

In addition, the Central Bank’s main concern is possible price increases driven by the services sector — the Monetary Policy Committee believes that the dynamism of the labor market and the expansion of real incomes could lead to inflation in the services sector. 

“A tighter labor market, with wage adjustments above the inflation target, could potentially slow down inflation convergence, notably impacting inflation in services and more labor-intensive sectors. Conversely, a favorable recovery in relative prices, benign commodity dynamics, or lower services inflation could potentially contribute to a faster disinflation process,” the minutes said.

For economist and independent consultant André Perfeito, this is the main internal factor that could interfere with the policy implemented so far. For this reason, he reads the market’s median forecast for the benchmark interest rate as too low; he believes the rate will end next year at 9.75 percent.

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