The country’s fiscal deviation is not as large as the market assessed, says BC president

The processing of the PEC dos Precatórios and the increase in uncertainties about the evolution of fiscal policy in the 2022 election year have generated a gradual deterioration in market agents’ expectations regarding economic growth, inflation and interest rates over the past few weeks.

The president of BC (Central Bank), Roberto Campos Neto, acknowledged that the government’s recent maneuvers to finance the payment of Auxílio Brasil, and even more than that, the way in which they were carried out, as well as the questions regarding the potential of long-term growth in domestic economic activity, help the country’s future interest rate curve to rise.

“We pay a very high price in terms of credibility for a tax deviation that is not that big, but there is a perception [do mercado] that the way it was done shook the existing fiscal framework,” stated Campos Neto, during an annual meeting of Febraban directors this Tuesday (30).

Premiums on the yield curve, which price market projections for the basic interest rate (Selic) ahead, operated in a drop this morning on the B3. Around 11:45 am, the rates on bonds maturing in January 2023 dropped from 11.88% at the close of the day to 11.80%. In the case of bonds for 2027, the drop was from 11.57% to 11.46%.

Campos Neto also stated that, with the market increasingly trying to glimpse what the global macroeconomic scenario will be in the post-pandemic period, a question that has arisen recurrently concerns the structural growth that Brazil will be able to deliver in the coming years.

“What started to enter into this risk premium price in the long curves is this doubt regarding our capacity to grow structurally. Remembering that, when we look back, in the last six, seven years, structural growth in Brazil it was quite low”.

President of Febraban (Brazilian Federation of Banks) and former director of BC, Isaac Sidney recalled the importance of approving the autonomy of the monetary authority, which took place in early 2021, especially at this time of strong inflationary pressures in Brazil and abroad.

“The Central Bank is undergoing a test by fire, but our firm expectation is that the formal independence that Congress has granted it, with the constitutional referendum of the Supreme Court, will make all the difference so that, without any hesitation, the guardian of our currency can deal with strong inflationary pressures in the global and domestic economy,” Sidney said.

The chairman of the board of directors of Febraban and co-chairman of the board of Itaú Unibanco, Pedro Moreira Salles, said that, although some caution with the risks brought by the pandemic and its variants is still needed, it is already possible to look at 2022 with a little more than optimism.

“If we cannot say that we have reached the end of the crisis, it is fair to recognize that we will go through it, and even more, that the worst is definitely over.”

The executive also said that the banking sector is well prepared to face the competition represented by digital banks and fintechs of all kinds.

“There are those who say that the banking sector, as we know it, will disappear to make way for a new reality. That’s not my view. It’s in the nature of banks to adapt to new scenarios. Wherever the frontiers of innovation lead the financial market —with new platforms, new currencies, new regulation or new forms of contact with customers—, the banking sector will continue to be its central and defining component,” said Salles.

“Instead of complaining about the wind, here we always prefer to adjust the sails. And I think we did that one more time,” he added.