The Central Bank president suggested in Washington yesterday
that caution would be adopted in shifting the fiscal policy of
Latin Americas largest economy, which faces the second
round of presidential elections on 31 October and a new
administration taking over on 1 January next year.
We now have a new government that will certainly be in
office on 1 January, 2011. It is important that we all keep an
optimistic posture, regardless of expectations, so that the new
government can announce the policies that it deems more
adequate, Henrique Meirelles, president of the Brazilian
central bank, said.
Mereilless stance is in sharp contrast with the tone
of previous declarations from the international financial
community. We would encourage the next Brazilian
administration to promote some fiscal adjustment, said
Nicolas Eyzaguirre, the IMFs Western hemisphere director
in an interview with Emerging Markets.
Given the strength of the cycle and the strength of
domestic demand, it would be advisable that they seize the
opportunity to have somewhat bigger primary budget surpluses,
and reduce their debt level, as well as lengthening the
maturity of public debt, given the very liquid financial
The government has a primary budget surplus target of 3.3%
of GDP (before interest payments), but it is currently running
at some 2% of GDP in annual terms and said it will resort to
creative accounting mechanisms to achieve its targets. Concerns
over overheating are also mounting, as the IMF forecasts GDP
growth to reach 7.5% this year (and 4.1% in 2011).
The output gap is closing fast in countries like Peru
and Brazil, Eyzaguirre said. In Brazil, there is
even a debate that the output gap has not only been closed but
it is now slightly in excess.
Furthermore, Augusto de la Torre, the World Banks
chief Latin America economist, has said the policy mix was
wrong, as it placed an excessive burden on monetary policy. The
Brazilian Central Bank has suspended its tightening cycle a few
weeks before the elections, but private analysts expect it to
resume tightening this year.
The central bank has also been accused of being behind the
curve. John Welch, chief strategist at Macquarie, said :
I am mystified at the central banks
misinterpretation. They started up [the tightening cycle]
behind the curve, and now they are delaying it. Dilma Rousseff
[the favourite to win the presidential election] has said she
does not think a fiscal adjustment is necessary,
Meirelles said this is a legitimate debate.
A lot of people say [the central bank] is actually ahead
of the curve, that it raised interest rates too much. Others
think it was not enough. This is a legitimate discussion
because the global economy is quite unstable.
Forecasts have proved to be quite wrong, because the
economy has been submitted to a series of exogenous shocks.
The Brazilian central bank has a record of maintaining
stability and inflation on target over the past seven years,
and certainly will it maintain this record and is committed to
deliver inflation at the core of the target in 2011
[4.5%], Meirelles said.