Central Bank of Brazil warns against lavish fiscal spending

Brazil’s central bank has warned that weakening fiscal discipline could have a “deleterious impact” on the effectiveness of monetary policy.

In the minutes of its latest meeting, published on Tuesday (September 25), the bank’s monetary policy committee said “the slowdown” in fiscal discipline, the increase in earmarked credit and the uncertainty over public debt stabilisation could raise the economy’s neutral interest rate. This, it said, would make it harder to control inflation.

The committee, known as Copom, said a credible fiscal policy was key to anchoring inflation expectations and reducing the risk premia of financial assets. It added that scenario analysis by the Central Bank of Brazil (BCB) projected a slowdown in public spending, though it did not provide a timeframe over when it expected this to happen.

The BCB raised its policy rate by 25 basis points last week, making it the only major Latin American central bank to tighten its monetary stance.

In the minutes, Copom said that the start of the current tightening cycle should be “gradual”. It did not give any indications of its next steps but reaffirmed its commitment to bringing inflation within its 3% target.

Year-on-year headline inflation was 4.24% in August, down slightly from the 4.5% recorded in July. Inflation expectations for the first quarter of 2026, the bank’s current policy horizon, stood at 3.5%.

“The disinflationary process was interrupted in the more recent period,” Copom said in the minutes. The domestic economy and labour market had been “more dynamic than expected”.

The committee said the rise in inflation for industrial goods and food may have reflected the depreciation of the currency and recent extreme weather events. Brazil is currently facing a drought that the authorities have described as the “most intense and widespread” they have ever recorded.