Strong Economic Activity Influences Brazil's Monetary Policy

By Marcela Ayres

(Reuters) – Brazil's central bank sees strong economic activity as a key factor for its monetary policy, incoming governor Gabriel Galipolo stated on Monday. The government is considering revising its 2024 growth projection upwards.

Central bank data indicated that Latin America's largest economy exceeded expectations in August, reinforcing heated momentum that prompted the central bank to initiate a monetary tightening cycle.

Galipolo, the current monetary policy director who will take over the central bank in January, emphasized the strength of economic activity as a "central theme" for policymakers.

He noted that this strength is influencing inflation expectations, pushing them further from the bank's 3% target while consumer prices remain above the official goal.

Finance Minister Fernando Haddad mentioned that the government may need to revise its GDP growth forecast again after a previous increase last month, where it was raised from 2.5% to 3.2% due to buoyant household consumption in a tight labor market.

"Unlike other countries, Brazil continues to show greater resilience in economic activity," Galipolo said.

The central bank highlighted the economy's strength, impacting inflation risk balance and leading to a rate hike of 25 basis points last month, bringing the benchmark rate to 10.75%. Market expectations suggest an acceleration of rate hikes to 50 basis points at the next meeting in November.

Galipolo remarked that inflation expectations remain unanchored at an "uncomfortable" level and stressed the need for interest rates to stay restrictive to bring inflation back to target.

Haddad pointed out that there have been "communication issues" from both the central bank and the government regarding these unanchored expectations.

The minister described real rates of 6.5-7% for public debt remuneration as "irrational," though he is confident that expectations will improve as market participants recognize President Luiz Inacio Lula da Silva's fiscal framework.

Haddad emphasized the importance of balancing spending dynamics with revenue flow. Galipolo acknowledged a reduction in fiscal stimulus is anticipated but advised caution in forecasting.

He also stated that Brazil's real is "persistently" undervalued against the U.S. dollar, stating that interventions in the currency market would only happen during liquidity shortages or excessive volatility.