By Marcela Ayres
(Reuters) -Brazil’s central bank sees strong economic activity as a key input for its monetary policy decision, incoming governor Gabriel Galipolo said on Monday, as the government provided signs it might revise its 2024 growth projection upwards again.
Central bank data earlier in the day showed that activity in Latin America’s largest economy again exceeded expectations in August, reinforcing the view of heated momentum that prompted the central bank to kick off a monetary tightening cycle.
Galipolo, the current monetary policy director who will take over the central bank in January, said at an event hosted by lender Itau in Sao Paulo that the strength of economic activity was a “central theme” for policymakers.
He labeled it the main factor driving inflation expectations further away from the bank’s 3% target while also impacting consumer prices, which remain above the official goal.
Speaking at the same event, Finance Minister Fernando Haddad said the government might need to revise its economic growth forecast for this year again, after bumping it up last month.
The ministry in September raised its gross domestic product (GDP) growth projection to 3.2% from 2.5% as activity continues to surprise on the upside, driven by buoyant household consumption amid a tight labor market.
“Unlike other countries, Brazil continues to show greater resilience in economic activity,” Galipolo said.
The central bank had highlighted the economy’s strength as a factor skewing the inflation risk balance to the upside when it began a rate-hiking cycle last month, raising the benchmark rate by 25 basis points to 10.75%.
Market expectations now suggest the pace of rate hikes will accelerate to 50 basis points at the next policy meeting in November.
Galipolo said that inflation expectations remain unanchored at an “uncomfortable” level, reiterating that the bank must keep interest rates at a sufficiently restrictive level for as long as necessary to bring inflation back to target.
Haddad, on the other hand, noted that there had been “communication issues” from both the central bank and the executive branch of government leading to the unanchored inflation expectations.
‘IRRATIONAL’
The minister stressed that real rates of 6.5-7% for the remuneration of public debt, currently reflected in the yield curve, “are irrational”, but expressed confidence that expectations would improve.
That would happen once market participants recognize the “intertemporal consistency” of President Luiz Inacio Lula da Silva’s fiscal framework, he said, adding that there was room to contain primary spending and reduce tax expenditures.
He emphasized the importance of calibrating spending dynamics and ensuring a revenue flow compatible with contracted expenditures.
Galipolo added that policymakers anticipate a reduction in fiscal stimulus but must be conservative in their forecasts.
The central bank director also pointed out that Brazil’s real is “persistently” undervalued against the U.S. dollar, emphasizing that interventions in the currency market would only occur when liquidity shortages or excessive volatility arise.
