Monetary Policy and Fiscal Expansion
Asked by an interviewer about the reasons for the Central Bank’s “stubbornness” in keeping the interest rate high, Campos Neto responded that a real interest rate for 10 years of around 6% a year has nothing to do with monetary policy, and is instead the fault of fiscal policy. Unfortunately, due to the frequency of this query, it is necessary to repeat the obvious ad nauseam.
Campos Neto went on to explain that to lower the interest rate, the Central Bank needs the collaboration of fiscal policy. In the inflation targeting regime, the nominal anchor is provided by expectations, and while these diverge from the target there is no way to begin an easing cycle. If the “central banker” were to commit this error, it would undermine his credibility, which is a fundamental factor to maintain the efficacy of monetary policy. While pressuring the Central Bank to lower the interest rate, the government is being faithful to the idea of a need for further fiscal stimulus, which should result in economic growth of about 2% in 2023.
The only certainty emerging from the fiscal framework approved by Congress is that spending will increase in real terms, in an interval between 0.6% and 2.5% a year. In the various estimates presented in previous reports, we have shown that even with strong real revenue growth, the public debt, which was 72.9% of GDP in 2022, will reach around 85% of GDP at the end of Lula’s four-year term, keeping the risk premiums high. Fiscal policy is acting in the opposite direction as monetary policy, which will inevitably postpone the start of the easing cycle.
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