Brazil’s Central Bank warns that increased public spending may cause volatility in the financial system

The Central Bank of Brazil considered that the expansion of public spending might increase inflation expectations and have repercussions on the financial system, according to the minutes of last week’s meeting of the Financial Stability Committee (Comef), released yesterday evening, Thursday, Nov. 24.

According to the document, the “breach of confidence in the fiscal regime” could affect the financial sector’s stability.

The Comef, formed by the directors and the president of the Central Bank of Brazil, establishes guidelines to maintain financial stability and prevent risks in the sector.

The body detailed that the results show that the system is “resilient” and has no significant problems, although, since the penultimate meeting last September, the increase in uncertainty has amplified the effects on the system.

“The most severe impact continues to be observed in the scenario of a breakdown of confidence in the fiscal regime,” he said.

He indicated that it also monitors the evolution of economic scenarios in Brazil and the world and remains prepared to act.

The monetary authority aims to minimize possible “disproportionate contamination” of local asset prices.

“Increased public spending and uncertainty about the trajectory of debt may increase risk premia and inflation expectations, with repercussions for financial stability,” it noted.

According to the report, this would translate into increased asset volatility, worsening agents’ ability to pay, and deterioration in the quality of capital flows.

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