Brazil’s central bank director says expansionary fiscal policy harms disinflation By Reuters

BRASILIA (Reuters) – A director of Brazil’s central bank said on Monday that if fiscal policy is always expansionary, it puts a lot of pressure on the floating exchange rate or monetary policy, making disinflation more costly.

Speaking on the 30th anniversary of the Plano Real, the new currency that tamed hyperinflation in Latin America’s largest economy, Renato Gomes, financial system director, said Brazil still lacks credible consolidation of its public accounts.

“I am absolutely certain that the (rate-setting board) Copom is fully committed to delivering inflation to the target. However, when fiscal policy does not help, the cost of disinflation becomes very high. And then the real economy suffers,” he said in a live session organized by the bank.

Gomes was part of the nine-member board that unanimously decided to pause the monetary easing cycle in June. Following a 325 basis-point reduction, the benchmark interest rate was held at 10.5%.

His comments come amid a sharp weakening of the Brazilian real and a rise in interest rate futures in recent weeks, reacting to fiscal and monetary fears fueled by constant attacks from President Luiz Inacio Lula da Silva on the central bank and his reluctance to cut spending, in addition to an external scenario marked by prolonged high interest rates.

Gomes also said it is essential to advance the proposal for financial autonomy for the monetary authority.

The proposal is currently under consideration in Congress but facing opposition from Lula’s government.