Campos Neto says it is necessary to break fiscal distrust

The president of the Central Bank, Roberto Campos Neto, said this Tuesday (19) that the market’s high projections for inflation and interest rates result from investors’ distrust about the country’s ability to balance public debt.
“Today we are experiencing an increase in the risk premium that is closely linked to a distrust among (market) agents that the government will not be able, in the long term, to balance the country’s fiscal result,” he said, at an event at the Commercial Association of São Paulo.
Campos Neto recalled that, unlike other nations, which face the same problem of not being able to generate primary surpluses, the “starting point” of Brazilian debt was already higher. This condition and the fact that Brazil has an already high interest rate, he added, make debt stabilization difficult.
Read also: Campos Neto once again defends positive fiscal shock in Brazil
When talking about the dynamics and effects of fiscal policy, he observed that, sometimes, an expansionary fiscal action, with the aim of stimulating the economy, can have an opposite effect, precisely due to the issue of risk premiums (increased interest rate expectations and inflation).
The BC president once again rejected the idea that monetary policy, today, is under the so-called “fiscal dominance” – when the dynamics of public spending render the effects of rising interest rates null and void.
“I don’t think we are in fiscal dominance, I think Brazil has a high debt, yes; other countries in the developed world had higher debts and went through the same question, whether or not they had fiscal dominance, so I don’t see fiscal dominance as a problem. It’s difficult for us to work with assumptions. What I think we need now is to understand that the world is heavily in debt; Brazil started with a higher debt, we need to control this”, he said.
Read also: Inflation expectations do not just reflect ‘evil people from Faria Lima’, says Campos Neto
Less expenses
In his view, the adjustment to be made has to change expectations, because, when these expectations regarding the fiscal framework improve, inflation projections tend to decline.
“We need to have some type of positive shock, which makes agents realize that the debt will be balanced at some point in the future. This has translated into what we get from the information, from the research that the BC does and from conversations with agents from the financial world and the real world”, he said, adding that this has translated into a perception that the adjustment needs to be give on the expenditure side, not on the revenue side.
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