BRASILIA (Reuters) – Brazil’s central bank chief Roberto Campos Neto said on Friday that inflation expectations are not aligned with official goals, and signaled they may not be anchored if the government’s fiscal targets do not converge.
Speaking at an event hosted by asset manager 1618 Investimentos, he referred to this situation as a “twin unanchoring” that must be addressed.
On one hand, the market does not believe that the central bank will bring inflation down to the target of 3% in the coming years. On the other hand, it projects a 2024 primary deficit of 0.8% of gross domestic product (GDP), while the government’s goal is to eliminate it by next year, said 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 added.
While he acknowledged improvement in consumer prices in Brazil, he pointed out that inflation readings are still above the center of the target, while inflation expectations are higher than the official goals.
“We have work to do,” he said.
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President Luiz Inacio Lula da Silva’s government has to raise revenues “a lot” to meet the fiscal target as planned, pointed out Campos Neto, predicting an improvement in fiscal expectations as revenue-increasing tax measures pass through Congress.
Brazil’s central bank initiated an easing cycle in August and last week cut the benchmark interest rate by another 50 basis points to 12.75%. Prior to that, policymakers had held rates steady for almost a year to combat inflation.
(Reporting by Marcela Ayres; editing by Christina Fincher)