By Jamie McGeever
BRASILIA (Reuters) -Brazil’s central bank will continue with its “partial normalization” of monetary policy unless it sees signs of inflation and inflation expectations rising significantly, central bank President Roberto Campos Neto said on Tuesday.
Speaking in a live online event hosted by Banco Itau, Campos Neto defended the bank’s stance of beginning its policy tightening cycle with aggressive interest rate hikes so as not to end up at a higher terminal rate.
“For that to be different, we need to see a very different scenario from what we envision,” he said, citing high commodity prices in reais and fiscal premiums at the long end of the curve boosting inflation and inflation expectations.
“These elements would have to change a lot for us to do something different,” he said.
Inflation is running well above the central bank’s 2021 target of 3.75%. With the exchange rate weak and fiscal outlook deteriorating, the risk is 2022 inflation expectations eventually drift above the central bank’s 3.50% target.
Campos Neto said the central bank is trying to base policy on a balanced, cautious outlook.
“I was equally concerned when people were concerned inflation was going to 1.5% as I am (now) when people think it is going to go over (target),” he said.
On foreign-exchange intervention, Campos Neto said the timing and size of any action is determined by market liquidity and conditions, not nominal FX levels.
“We’re not in the business of trading, so we don’t look at FX every day and trade FX. What we try to do now is look at whether the market is dysfunctional or not, and try to quantify the amount of reserves needed to counteract that dysfunction,” he said.
On the economy, Campos Neto said the second wave of the COVID-19 pandemic sweeping Brazil will dent activity in March, April and even into May before widespread vaccines help fuel the recovery in the second half of the year.
(Reporting by Jamie McGeever in BrasiliaEditing by Matthew Lewis)
