No fiscal dominance in Brazil, policymakers say
SAO PAULO, Oct 24 (Reuters) -There are no signs pointing to a regime of fiscal dominance in Brazil, despite market anxiety surrounding public accounts, and the central bank is monitoring the situation, two policymakers said this week.
Fiscal dominance is an economic condition characterized by a lack of government budgetary control, in which monetary policy loses its effectiveness in controlling inflation.
"I don't think there is a fiscal dominance," the central bank's economic policy director, Diogo Guillen, said on Thursday at a JP Morgan event in Washington.
"You need a passive central banker to have fiscal dominance, and there will not be a passive monetary policy."
Central bank chiefRoberto Campos Neto had told investors at a UBS meeting in Washington on Wednesdaythat policymakers do notsee any evidence of fiscal dominance in Latin America's largest economy, but added the need to "watch out for that."
Market participants are questioning the government's ability to maintain its fiscal framework,as mandatory expenses have been rising at a rapid pace, squeezing out the room for other spending under a rule that limits overall expenditure growth, approved by President Luiz Inacio Lula da Silva last year.
While the economic team has recently signaled plans to adopt structural measures for controlling expenses, Lula has publicly shown resistance to adopting broad spending cuts.
Brazil's Finance Minister, Fernando Haddad, has assured that the government's primary result will stay within the tolerance band in 2024, saying that it is an exaggeration to say the country is neglecting public finances.
Still, markets remain suspicious, something reflected in the yield curve. According to Campos Neto, "there was a perception - at least that's the feedback that we get from the market - that not only the fiscal was getting worse, but the transparency" as well.
The central bank's rate-setting committee, known as Copom, kicked off an interest rate-hiking cycle last month with a 25 basis-point increase, to 10.75%, and signaled more tightening ahead.
This week, Campos Neto, Guillen and fellow central bank director Paulo Picchetti have reinforced the monetary authority's commitment to do whatever it takes to lower consumer prices, as inflation expectations remain above the bank's 3% target.
Reporting by Luana Maria Benedito; editing by Diane Craft
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