(Bloomberg) — Brazil central bankers are talking too much, including about a possible interest rate hike, and undercutting what would otherwise be a perfectly fine strategy of keeping borrowing costs steady to fight inflation, a former director said.
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Board members should limit their public appearances because the high number of speeches is adding noise and market volatility by “communicating in excess,” especially on chances of a rate hike, former Central Bank Economic Policy Director Luiz Awazu said in an interview. Holding borrowing costs steady at 10.5%, as the monetary authority has done since June, is appropriate while waiting for greater clarity on Brazil’s public spending, he said.
Brazil’s central bank “doesn’t need to become a monk vowing silence, but it must have more parsimony,” said Awazu, who also served as the institution’s international affairs director. For policymakers around the world including Brazil, overcommunicating is “a force of habit” after a period of low rates and bond-buying programs that needed to be explained, he said.
“It’s one of the evils of our time,” said Awazu, who is now a visiting professor at the University of Tokyo and has often been considered a candidate to return to the Brazil central bank board.
Brazil central bankers have participated in at least 30 open events this month according to official agendas, rattling sensitive markets and driving swings in assets including the currency with comments on monetary policy. On Aug. 6, the board signaled for the first time that it would raise rates if needed. In more recent speeches, members have said they are data-dependent with all options — including a hike — on the table before their September meeting.
Yet, investors are abandoning bets of steady rates left and right. Most traders in the digital options market are pricing in either a quarter-point or a half-point hike next month, and some economists also see tightening.
Prices are firming as evidence mounts that Brazil’s economy is resisting high rates. Annual inflation hit the ceiling of the bank’s tolerance range in July, at 4.5%, while activity soared past all forecasts in June.
President Luiz Inacio Lula da Silva has also raised public spending as he moves to improve the living standards of ordinary Brazilians. Analysts surveyed by the central bank see cost-of-living increases above the 3% target through 2027.
In that context, investors are questioning the government’s plans to rein in this year’s primary budget deficit, which excludes interest payments. The economic team has said it would aim for a balanced budget in 2025, disappointing investors who wanted the administration to make good on pledges for a surplus and for stronger efforts to tame debt.
For Awazu, a former deputy manager at the Bank for International Settlements, Lula is coming up short on details regarding the nation’s fiscal policy. The government should “explicitly say the priority is to be investment-grade again,” he said, referring to the credit ranking Brazil lost in 2015.
Put together, the mix of restrictive rates amid higher spending will also limit any respite from the Federal Reserve’s eventual borrowing cost cuts, Awazu said. Rate differentials between Latin America’s largest economy and the US will decrease “only a bit,” meaning Brazil’s debt costs will remain elevated.
Brazil, as with other central banks, is also facing challenges like a climate crisis, the effect of wars and the economic impact of global supply chain changes.
The Fed’s rate cuts “are not a relief to anyone,” said Awazu.
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Publish date : 2024-08-27 22:00:00
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