Brazil’s central bank again highlights considerable uncertainty about the economy

The Monetary Policy Committee (Copom) of the Central Bank repeated on Tuesday, 13, in the minutes of last week’s meeting, the fiscal warning made in last week’s communiqué, when it maintained the Selic rate at 13.75% for the third time in a row.

According to the minutes, the “Committee considered that there is still a lot of uncertainty about the prospective fiscal scenario and that the moment requires serenity in evaluating risks”.

The warning was given again amid negotiations to increase public spending in 2023 to finance the campaign promises of the president-elect, Luiz Inácio Lula da Silva (PT, progressive-globalist).

Once again, Copom made it clear that “fiscal policy can affect inflation not only through direct effects on aggregate demand but also via asset prices, the degree of uncertainty in the economy, inflation expectations, and the neutral interest rate.

“The Committee assessed that changes in parafiscal policies or the reversal of structural reforms that lead to a less efficient allocation of resources may reduce the potency of monetary policy,” Copom wrote in the minutes.

After the Copom meeting last week, the Proposal of Amendment to the Constitution (PEC) of the transition was approved in two rounds in the Senate, and this week, it must go through the House.

Currently, the text provides an increase of R$145 (US$27) billion in the spending cap, with permission also to spend beyond the rule R$23 billion in investments paid with extraordinary revenues.

Despite the reiteration of the alert, the Central Bank’s balance of risks remained at three factors in both directions.

As an upside risk, Copom still cited the greater persistence of global inflationary pressures and a narrower output gap than that used by the committee, especially in the labor market.

According to the Central Bank, inflationary risk in the country is due to three factors, including

• the greater persistence of global inflationary pressures;
• high uncertainty about the future of the country’s fiscal framework and additional fiscal stimuli to maintain aggregate demand, and
• a narrower output gap than the one currently used by the Committee in its reference scenario, particularly in the labor market.

On the other hand, a further decline in international commodity prices in local currency, a sharper-than-projected slowdown in global economic activity, and the maintenance of tax cuts projected to be reversed in 2023 may influence the lowering of inflation.

“The environment, particularly uncertain in the fiscal sphere, requires serenity in assessing risks.”

“The committee will monitor with special attention future developments in fiscal policy and, in particular, their effects on asset prices and inflation expectations, with potential impacts on prospective inflation dynamics,” Copom said in the minutes.

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