Fiscal uncertainty for 2023 raises inflation expectations and may force BC to raise interest rates, economists warn

While discussing the size of expenditures that will exceed the Spending Ceiling in 2023 – with proposals ranging from R$70 billion to over R$200 billion – one cannot reduce the importance of the debate on the new framework of fiscal rules that will take effect in the coming years. The defense of these theses is in the most recent Macro Bulletin of the Brazilian Institute of Economics (Ibre) of the FGV.

In an article signed by economists Armando Castelar Pinheiro and Silvia Matos, it is mentioned that the extra-ceiling volume and the new rules are surrounded by uncertainties and that this increases the risk of the country “operating in the negative for several years”.

“A waiver of around BRL 200 billion per year will generate an expansion of expenses of BRL 1 trillion in five years. That is, 10% of GDP in direct spending, which will be added to the interest that will be levied on the public debt that will have to be issued to finance this increase in spending”, says the article.

Among the possible consequences of this permanent increase in spending, the authors cite greater inflationary pressure, increased country risk and greater exchange rate depreciation. “There will be no other way out for the monetary authority than to react, initiating a new cycle of monetary tightening, or at least not going ahead with the reduction in interest rates that were projected for next year”, they comment.

At an Acrefi seminar this Wednesday morning (23), former Central Bank director Alexandre Schwartsman said that this risk “is a concrete possibility”. He said that the projections on inflation for 2023 in the Focus Bulletin already show a certain detachment from expectations, from the BC’s anchoring capacity and that this is fundamentally linked to fiscal uncertainty.

According to the partner at Schwartsman & Associados, when the Central Bank decided to interrupt the interest rate hike cycle and park the Selic at 13.75%, estimates for the rate in six months showed a strong expectation of a drop in 2023. Now, he says For the economist, what draws attention is the strong jump that occurred in the “forward” rate from the second half of next year.

“The drop that was expected changed due to fiscal developments. The perception is that, contrary to the monetary brake, a fiscal accelerator of great proportions is coming. Therefore, the risk that the BC will be forced to either maintain current rates for a longer period or eventually be forced to raise interest rates becomes a concrete possibility,” he said.

He points out that the DI curve points to a possibility that the Central Bank will raise interest rates by 25 basis points between March and April, with another similar adjustment at the next meeting, depending on the size proposed for the extra spending.

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