Brazil central bank eyes high rates for longer due to Lula fiscal risks

<html xmlns=""><head><title>UPDATE 2-Brazil central bank eyes high rates for longer due to Lula fiscal risks</title></head><body>

Adds details of policy statement, economist comment

By Marcela Ayres

BRASILIA, Feb 1 (Reuters) -Brazil's central bank on Wednesday said it was considering holding interest rates at a six-year high for longer than markets expect due to fiscal risks under recently inaugurated President Luiz Inacio Lula da Silva.

The bank's rate-setting committee, known as Copom, left itsSelic benchmark interest rate at 13.75% in Wednesday's policy decision, as expected by all 30 economists in a Reuters poll.

Although the rate decision was nosurprise, the accompanyingstatement served as a firm warning ofhow a newly independent central bank would act under the leftist Lula administration.

"The current scenario, particularly uncertain on the fiscal side and with inflation expectations drifting away from the inflation target on longer horizons, requires further attention when evaluating risks," the committee said in its statement.

Policymakers said they were weighing whether holding the Selic policy rate unchanged for longer than most forecasts in the bank's weekly survey of private economists will be enough to bring inflation back to target. Copom reiterated that they "will not hesitate to resume the tightening cycle" if inflation does not cool as expected.

The policy statement was even harsher than most expected, said Claudia Moreno, an economist at C6 Bank, adding that it may mean the central bank does not cut interest rates until 2024.

The median forecast in the central bank's most recent Focus survey pointed to a first rate cut of 25 basis points in September, followed by cuts of half a percentage point each in November and December to end the year with the Selic at 12.5%.

In Wednesday's statement, policymakers introduced "an alternative scenario" in their models, with interest rates steady through 2024 and inflation converging to around the central bank's target next year.

Selected by right-wing former President Jair Bolsonaro to head the central bank, Roberto Campos Neto had his mandate extended to the end of 2024 under a new law granting the bank formal autonomy, setting up an unprecedented situation in Latin America's largest economy.

Lula said formal central bank independence was "nonsense" and argued the current inflation target hinders economic growth, in remarks that rattled markets before officials saidno changes were planned to the central bank or its inflation goals.

Since taking office on Jan. 1, Lulahas criticized Brazil's high interest rates amid cooling consumer prices. Annual inflation, which ran indouble digits from September 2021 to July 2022, fellto 5.87% in the 12 months to mid-January.

Still, that is well above the bank's official inflation targets of 3.25% in 2023 and 3% in 2024, with a tolerance margin of 1.5 percentage points up or down.

The central bank, which pausedan aggressive tightening cycle in September after 12 straight rate hikes, has avoided open confrontation with the new government. But Campos Neto highlighted that additional spending planned by Lula was already affecting inflation expectations since last year.

Brazil's Finance Ministry presented plans to more than halve the government's estimated budget deficit this year by boosting revenue and trimming expenditures.

However, many economists have questioned whether the government can pull that off, focusing expectations instead on new long-term fiscal rules promised by April to replace a constitutional spending cap that has been repeatedly adjusted.

Reporting by Marcela Ayres
Editing by Brad Haynes and Diane Craft


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