Roberto Campos Neto said monetary authority’s work becomes more challenging if fiscal policy lacks credibility
16/04/2024
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Roberto Campos Neto — Foto: Rovena Rosa/Agência Brasil
The work of the Central Bank becomes more difficult if there is a perception that there is no fiscal anchor, said Roberto Campos Neto, the president of the Brazilian Central Bank, during an event in New York on Monday. Asked how changes in fiscal rules affect the work of monetary policy, he explained that central banks have to refrain from making comments on fiscal policies.
However, he emphasized that “fiscal and monetary anchors go hand in hand, and whenever there is a change that makes the fiscal trajectory less transparent or less credible, it means having to bear higher costs on the other side. Therefore, the cost of conducting monetary policy increases.”
The president of the Central Bank noted, however, that the market “had a much worse outlook for the fiscal situation than the target actually adopted by the government.” Mr. Campos Neto added, “I have been saying for a long time that the ideal is not to change the goals and do as much as possible to achieve these goals.” But “if, for some reason, we have to change it, it’s very important to communicate well, because if people lose confidence in the fiscal anchor, the monetary anchor will be affected.”
The fact that the United States is postponing the start of the monetary easing cycle, with expectations consolidating around a higher rate at the end of the cycle, may begin to draw attention to the debts of the main developed countries, the central banker said.
“When we look at what happened in the U.S., people thought for a while that rate cuts would start in March. And when that doesn’t happen, the window basically moves in time as a result, and now that the [inflation and activity] data is disappointing [coming in stronger than expected], the terminal rate changes as a result.”
In his view, “there was a re-pricing of rates [by the market], but what we should observe and which will probably become the next big issue is that we are about to start a debate on global debt.”
According to the president of the Brazilian Central Bank, “the fact that the U.S. is now postponing the cycle, but also has a higher terminal rate, will make people talk about the debt.” Mr. Campos Neto cited that the largest blocs of developed economies—Japan, Europe, and the U.S. — have a sovereign debt representing a large proportion of the total global debt.
“If you look at the fact that they paid close to 1% [before inflation returned] on the debt rollover, and if that goes to 3%, it means a threefold higher cost on the largest debt on the planet. So I think the next topic we’re going to talk about is not the inflation window. Last year, when no one was talking about it, we mentioned that we didn’t see disinflation processes as smooth as some people were saying. Now agents are pricing to some extent that the cycle is going to be delayed a bit. The next big question will be about what happens to total debt.”
According to Mr. Campos Neto, “the fiscal policy is becoming less and less coordinated with the monetary [in most of the world].” For him, when we entered the pandemic, it was very easy to coordinate the responses. “You increase spending and reduce [interest] rates,” he said about stimulus programs
“But the end of that is being very difficult to coordinate. And there’s nothing more permanent than a temporary spending program. That was a phrase I borrowed from Milton Friedman. But you see it in many different places, and I think it will become a problem.”
*Por Sérgio Tauhata — São Paulo
Source: Valor International