Copom minutes reinforce BC’s concern about subsequent authorities’s fiscal dynamics
Minutes highlight possible inflationary effects of expansionary measures and say there is “greater sensitivity” of the market to fiscal fundamentals
The minutes of the last meeting of the Monetary Policy Committee (Copom) of the Central Bank released this Tuesday, the 13th, once again highlighted the “high uncertainty about the future of the country’s fiscal framework and additional fiscal stimuli”. The concerns refer, albeit indirectly, to the Transition PEC, which proposes an increase in expenses without counterparts, and the expected replacement of the expenditure ceiling by a new fiscal anchor.
The dynamics of fiscal policy, according to the Copom minutes, “may affect inflation not only through direct effects on aggregate demand, but also via asset prices, degree of uncertainty in the economy, inflation expectations and neutral interest rates” .
The Central Bank also stated that the effects of monetary policy should lose strength in case of “reversal of structural reforms that lead to a less efficient allocation of resources”. The statements contained in the increase, it is worth mentioning, were made in the face of signs that the new government could review reforms made in recent years, such as social security and labor.
The minutes also pointed out that, without the “existence of idle capacity in the economy and confidence about sustainability”, expansionist policies may not have the desired effect on economic activity. “In an environment of reduced output gap, the impact of significant fiscal stimuli on the inflation trajectory tends to overlap with the desired impacts on economic activity.”
UK in the rear view
The Copom also warned about the effects of possible fiscal adventures, drawing a parallel with the international environment. According to the minutes, there is “a greater sensitivity of financial assets to fiscal fundamentals, including in advanced countries”. The environment, therefore, “requires greater caution in the conduct of economic policies by emerging countries as well,” said the minutes. The reference, albeit indirectly, goes back to the episode in the United Kingdom, in which the pound sterling hit a historic low against the dollar after the announcement of expansionary measures by the then new government of Prime Minister Liz Truss.
Moment of “serenity”
According to the Copom, “there is still a lot of uncertainty about the fiscal scenario” and the moment “requires serenity in risk assessment”. In last week’s meeting, the Copom kept the Selic rate stable for the fourth consecutive decision.
“The Committee will closely monitor future developments in fiscal policy and, in particular, their effects on asset prices and inflation expectations, with potential impacts on prospective inflation dynamics,” he said.
Inflation still challenging
On the inflation side, the Copom classified the scenario as still “challenging”. The board said it expected the recent commodity slump to ease global pressures on goods, but services inflation “might take time to dissipate”.