MNI INTERVIEW: Brazilian Real Improvement Is Temporary - Velho
MNI (BRASILIA) - The recent appreciation of the Brazilian real is temporary and will not be enough to curb inflation unless the government implements fiscal measures to improve the public debt outlook, former economic advisor to the Ministry of Planning and Budget Eduardo Velho told MNI.
In this context, the Central Bank of Brazil is likely to stick to its forward guidance of two 100 basis-point rate hikes in its upcoming meetings, bringing the Selic rate to at least 14.25%, while waiting to reassess the situation after March, he said.
"There were two waves of mistrust, one related to fiscal policy and the other to inflation, that led to the real’s depreciation at the end of last year. The central bank’s interventions softened this movement, but they don’t solve the problem. In my view, this recent exchange rate improvement is not linked to domestic markets but to the 'Trump effect,'" Velho, now chief economist at JF Trust Asset Manager, said in an interview. (See MNI INTERVIEW: BCB Likely To Stick To 100BP Guidance-Le Grazie)
Investors perceived the inaugural speech by U.S. President Donald Trump as more moderate regarding import tariffs, which weakened the dollar, he said. Since Trump's inauguration, the real strengthened to around BRL 5.90, down from above BRL 6.
GROWING DEBT
"The debt continues to grow, the outlook remains upward, and there is no reason for the dollar to weaken significantly against the real," he added.
The economist expects January inflation data, to be released in February, to bring some relief but predicts it will accelerate in subsequent months.
According to the former government advisor, Brazil is experiencing a situation of moderate fiscal dominance. "Ideally, the government should coordinate a fiscal shock."
MONETARY POLICY
Velho believes the Central Bank will deliver the two 100-basis-point hikes already signaled but will refrain from extending its forward guidance, choosing instead to wait and monitor the data.
"If the BCB signals further hikes after March, it would indicate that inflation is a concern and could signal to the market that inflation is more persistent than expected," he said.