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By Howard Schneider
JACKSON HOLE, Wyoming (Reuters) -Brazil’s central bank chief said on Saturday that discussing monetary policy transmission will become increasingly difficult without addressing fiscal issues, citing the growing burden of public debt driven by expanded government spending.
Speaking at the Kansas City Federal Reserve’s annual economic conference in Jackson Hole, Wyoming, Roberto Campos Neto stressed that income transfer programs implemented during the pandemic are now larger and have become permanent.
In Brazil, 50 million people are “gaining money from the government compared to 43 million people who are employees and entrepreneurs,” he added.
Without directly mentioning President Luiz Inacio Lula da Silva’s government, he said, “We need to think about accurate strategy and understand the efficiency of these government programs, especially in emerging market countries, and what that did to the debt.”
“I think we need to start communicating better the misallocation of resources.”
In July, Brazilian policymakers kept the Selic benchmark interest rate unchanged at 10.5% for the second consecutive time but toughened their rhetoric, citing the need for “even greater caution” and “diligent monitoring of inflation conditioning factors.”
In the minutes of the decision, the central bank said it was closely monitoring how recent fiscal developments impact monetary policy and financial assets, amid market concerns that Lula’s leftist government will not eliminate its primary deficit this year and next as promised under new fiscal rules, due to increasing expenditures.
“We need to address the debt in factoring the dynamics of the markets from now on, and unfortunately, it’s going to be very difficult to talk about the (monetary policy) transmission without talking a little bit more about the fiscal,” said Campos Neto, whose term ends in December.
He said that recent volatility may be showing the market is pricing in less room for fiscal and monetary intervention in the future.
Speaking about China’s deceleration, he said this could impact Brazil through terms of a trade shock or lower import prices for Chinese goods, though the net effect would depend on how big the slowdown is.
Central bankers from around the world flew into Jackson Hole this week to attend what has become the globe’s premier economic gathering, the annual symposium in Grand Teton National Park.
The panel Campos Neto spoke on discussed monetary transmission, or exactly how much effect interest rate movements have on economic activity.
His remarks followed recent communication efforts by rate-setting members of the Brazilian central bank to emphasize that they remain united, considering all options for the upcoming Sept. 17-18 policy decision including a rate increase if necessary.
Campos Neto and other central bank directors have highlighted that there is no set guidance for the future, a stance they described as data-dependent.
Annual inflation in Brazil reached 4.5% in July, drifting further away from the 3% official target, which has a tolerance band of 1.5 percentage points in either direction.
Interest rate futures are pricing an over 80% chance of a rate hike next month, which, if confirmed, would occur as the U.S. Fed readies monetary loosening.
(Reporting by Howard Schneider in Jackson Hole, Marcela Ayres in Brasilia; Editing by Mark Porter, David Gregorio and Deepa Babington)