Brazil’s central bank is increasingly worried about upward pressure in core inflation and what it describes as unanchored inflation expectations, central bank director Paulo Picchetti said while speaking at an event in Washington D.C.
Picchetti emphasized that the final scope of the central bank’s monetary policy calibration is still undecided and that the institution has intentionally refrained from offering guidance on its next moves. He said anxiety in markets does not justify providing guidance at this time, and noted that considerable developments could occur before the next interest-rate decision.
The director pointed to persistent unanchored inflation expectations, suggesting this may reflect market skepticism about fiscal consolidation. He said the most recent inflation figures had been a surprise to everyone and stressed that the central bank evaluates a mix of indicators and remains data dependent in its approach.
Picchetti also noted the central bank pays close attention to market expectations, but that distinguishing a genuine trend from short-term noise has been difficult. He warned that should risks shift to the downside, the government budget cycle would feel the impact.
On geopolitical uncertainty, Picchetti said the bank lacks a clear judgment about the war in Iran and is uncertain about updating its balance of risks, given that uncertainty on both the upside and downside has increased.
Looking at the domestic economy, he said the central bank anticipates a further slowdown in economic activity in the near term, while acknowledging that the labor market remains tight. Picchetti added that some of the recent gains in incomes could be used to pay down loans.
Finally, he remarked that the central bank acted earlier than other institutions in responding to developments, without elaborating further on timing or measures.
Summary
The central bank is concerned about rising core inflation and unanchored expectations. Officials have left policy calibration open and chosen not to provide forward guidance, citing volatile and surprising inflation data, mixed market signals, fiscal doubts, and elevated uncertainty from external events.
Key points
- Core inflation measures are rising and inflation expectations appear unanchored, according to central bank director Paulo Picchetti.
- The central bank has kept the final size of monetary policy calibration open and decided not to offer guidance ahead of the next decision.
- Officials are data dependent, watch market expectations closely, and note increased uncertainty from both domestic fiscal prospects and the conflict in Iran.
Risks and uncertainties
- Persistently unanchored inflation expectations could affect market pricing and policy credibility - relevant to bond markets and financial traders.
- Uncertainty about fiscal consolidation may influence the government budget cycle if risks shift, impacting sovereign finances.
- Geopolitical uncertainty related to the war in Iran has increased the ambiguity of the central bank’s balance of risks, complicating policy assessment.