Mantega Sees Room for 2015 Monetary Easing on Higher Fiscal Goal

Brazil’s Finance Minister Guido Mantega says the government will make an effort to increase the primary surplus in 2015 in a bid to allow the central bank to adopt a more expansionary policy.

The government today released 2015 budget guidelines that set a budget surplus target before interest payment of at least 114.7 billion reais ($51 billion), or 2 percent of gross domestic product, an increase from this year’s target of 1.9 percent of GDP.

President Dilma Rousseff’s fiscal management has come under fire this year, as lower revenues and faster spending have expanded the country’s deficit. Standard and Poor’s in March downgrade Brazil sovereign rating for the first time in a decade on flagging growth and an expansionary fiscal policy. Mantega said today it will be difficult to meet this year’s fiscal target and the government will work to deliver the widest possible primary surplus.

“We will do an effort on the spending side to deliver a wider primary surplus, giving more room for a more flexible monetary policy,” Mantega told reporters in Brasilia today. He added that the budget guidelines would be revised in December.

Reaching the primary surplus target this year will be difficult, with the government battling to deliver the largest possible surplus, Mantega said.

A mix of fiscal and monetary policies will ensure greater growth in 2015, Mantega said. The country won’t face inflationary pressures, such as a weaker currency and a drought, that fueled price increases this year.

2015 Growth

The government today projected economic growth of 3 percent next year, with inflation of 5 percent. Economists in the latest weekly central bank survey forecast 2015 expansion of 1.2 percent with inflation of 6.28 percent.

Annual inflation in July reached 6.49 percent. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

The central bank kept the benchmark interest rate unchanged at 11 percent in its two past meetings, after raising it 375 percentage points in the previous nine meetings. Central bank President Alexandre Tombini said Aug. 5 inflation will converge to target if the current monetary conditions are maintained.

“Mantega is signaling that with fiscal tightening, monetary loosening would be possible, and that means getting the benchmark rate down,” said Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, by telephone from Sao Paulo. “To me, that doesn’t make any sense. The market estimates that inflation will only converge to the center of the target by 2017. I just don’t see how it is possible to make monetary policy more flexible.”

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