Sterling drop ‘related message’ to financial risks

Published on 9/9/2022 2:49 PM / Updated on 9/9/2022 2:52 PM

The President of the Central Bank, Roberto Campos Neto, emphasized that concern about financial risks and the environment of internal and external uncertainty for the conduct of monetary policy does not exist only in Brazil, because it directly affects the exchange rate – one of the main factors affecting inflation, which has not yet been fully tamed .

Campos Neto cited the recent case of the devaluation of the pound due to the inconsistency of a more credible fiscal policy as an example to be avoided in Brazil. The British currency has collapsed in recent days and is practically on par with the dollar, after the United Kingdom announced tax cuts without a clear indication of how the measure would be covered to try to stimulate the economy. In the year, the devaluation of the pound against the dollar has already exceeded 20%.

For the central bank chief, this reaction was a “relevant message” about how agents would care about risks, particularly the financial issue, and how the stimulus measures adopted since the pandemic would be financed by governments.

“What happened in England shows that a plan was introduced with a large financial component without addressing how to maintain the financial balance in advance, and the creditors responded by imposing more risk premiums,” summarizes Campos Neto, this Thursday (29/9), during a virtual interview with reporters from Yes View Quarterly Inflation Report (RTI) with Better Gross Domestic Product (GDP) forecast. “That’s a related message that we should take away from that, because markets are starting to get more concerned about how to pay that bill in terms of taxes,” he added.

Expectations

The British Columbia president also indicated that the recent devaluation of the riyal amid this global turmoil does not affect the monetary authority’s expectations of the exchange rate, currently around 5.20 Brazilian reais. According to him, despite the recent rise in volatility throughout the year, “the Brazilian currency has performed better than other emerging currencies.”

It should be noted that the fiscal bombs that the government of Jair Bolsonaro (PL) has armed in 2023 are quite relevant and threaten the preservation of the current financial framework, which has been discredited since the approval of the PEC dos Precatórios, which has thrown tens of billions of reais in judicial debts under the rug and helped create a perception financial balance.

Some estimates point to around R$200 billion in expenditures that still lack a reliable source of revenue in the 2023 budget and that whoever wins this year’s election will inherit.