(Adds Barclays forecast change)
By Jamie McGeever and Isabel Versiani
BRASILIA, Feb 9 (Reuters) – Coronavirus aid to the poor without spending cuts elsewhere could drive up risk premia on Brazil’s debt and currency, potentially forcing the central bank to raise interest rates faster or more than expected, the bank’s manager said on Tuesday.
President Jair Bolsonaro confirmed on Monday that the government was discussing a program to extend emergency aid to millions of Brazilians hard hit by the COVID-19 pandemic. A source involved in the talks said the package would be worth around $1.1 billion a month for three months.
But noting the current high levels of market risk premium and currency volatility, Central Bank President Roberto Campos Neto said the government must also take other fiscal measures to insure markets in its long-term commitment to reduce its record debt.
“If you do another fiscal package without any quid pro quo, the message that’s going to be given is that the trajectory of debt is going to continue to rise,” Campos Neto said at an online event hosted by consultancy Observatory Group. .
“The risk premium that investors will demand for holding Brazil’s debt…and you also see that in FX…could have an implication on what kind of policy the central bank can pursue,” he said. he declares.
Barclays economists said on Tuesday that the prospect of more fiscal support for the poor will help push inflation above the central bank’s 3.75% target this year. They now expect the central bank to raise rates at its next meeting in March.
Tuesday’s figures showed annual inflation jumped to 4.56% in January, the highest for that month in four years and well above the 3.75% year-end target of the central bank.
“I see the market has been very, very sensitive to small changes (in inflation). I understand there’s a lot of anxiety in the market looking at real-time data, but for us we have develop a longer-term policy,” says Campos Neto.
Campos Neto acknowledged that inflation is higher than expected by politicians, largely due to food prices, which also lifted basic measures. (Reporting by Jamie McGeever and Isabel Versiani; editing by Nick Macfie and Peter Graff)