Brazil's spending package affecting inflation expectations, says central bank

• Brazil's central bank already believes a recently proposed spending package is partly affecting closely watched inflation expectations, said the bank's chief Roberto Campos Neto. Notably, policymakers have highlighted inflationary risks arising from leftist President-elect Luiz Inacio Lula da Silva's 168Bn reais ($31.5Bn) spending proposal to meet his campaign promises. 
• For its current inflation projections, Neto noted that the central bank has considered a fiscal expansion of 130Bn reais next year extracted from market estimates. Notably, the central bank held interest rates at 13.75% this month, after a September pause to an aggressive tightening that lifted rates from a 2% record low in March 2021 to battle inflation.
• Faced with expected pressure on the public debt due to booming expenses, economists have taken a more conservative stance on when rate cuts would begin in Latin America's largest economy, with some predicting hikes to be even resumed next year.
• However, Neto pointed out that coordination between fiscal and monetary policies is "very important," and the central bank needs proper conditions to lower rates.
• He also said that returns to sizeable subsidized credit would negatively impact the neutral interest rate and reduce monetary policy power, praising the long-term rate as an "institutional gain" that helped the capital markets expansion. The long-term rate was implemented in 2018 to bring the cost of state-run development bank BNDES lending rates in line with those of the market. The government transition team recently said it is too high and should be reformed.

(Source: Reuters)