RIO DE JANEIRO, BRAZIL – Brazil’s Economy Minister warned Friday that Western central banks are “sleeping at the driving wheel” while economies slip deeper into a high inflation environment.
Speaking at The Davos Agenda virtual event, Paulo Guedes said that the inflation “beast” is loose and set to become a real problem.“My fear is that the beast is out of the bottle,” Guedes told the panel.
“I think Central Banks are sleeping at the driving wheel. They should be aware, and I think inflation will be a problem, a real problem very soon for the Western world,” he said.
Far from being transitory as some bankers have suggested, Guedes said that inflation could be a long-term issue for Western governments, who have left themselves little room for maneuver.
“I don’t think inflation will be transitory at all,” he said. “I think these supply adverse shocks will fade away gradually, but there’s no arbitrage anymore to be exploited by the Western sides.”
Brazil moved early to stem the worst inflationary pressures by winding down its Covid stimulus packages last year, Guedes said.
Brazil’s economy briefly returned to pre-pandemic levels in 2021 before slipping lower again.
“We took advantage of the recovery to gradually remove the monetary and fiscal [stimulus],” Guedes said, adding that the government has room to react should another coronavirus wave emerge.
Guedes’ comments contrast with Central Bank chiefs who argue that current levels of inflation are, indeed, transitory and containable.
Also speaking at The Davos Agenda Friday, European Central Bank President Christine Lagarde said inflation in the euro zone was unlikely to worsen dramatically, arguing that the recent surge was due to short-term pressures such as supply bottlenecks and energy prices.
Meanwhile, U.S. Federal Reserve Chair Jerome Powell is widely expected to hike interest rates at the central bank’s next meeting in a bid to stem rising inflation. It follows similar moves by the Bank of England in December.