Bonds News

UPDATE 1-Brazil central bank could withdraw forward guidance even if spending cap intact -Campos Neto

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BRASILIA, Nov 5 (Reuters) - Brazil’s central bank could withdraw its “forward guidance” pledge to keep interest rates low for a long time even if the government honors its spending cap but uses creative ways to increase spending, central bank president Roberto Campos Neto said on Thursday.

Speaking in an online event hosted by the ProPague Institute, Campos Neto said Brazil’s rates curve is closely tied to the country’s fiscal credibility and that longer-term borrowing costs must come down to spur private sector investment.

The central bank last month kept its benchmark Selic interest rate on hold at a record low 2.00%, but the accompanying statement disappointed some economists who had expected a firmer line on the recent spike in inflation and growing concern over the public finances.

“We are looking at the spending ceiling, but obviously we will consider any creative way to generate more permanent spending as a break,” he said, referring to the government’s fiscal rule that public spending cannot grow faster than the rate of inflation.

Many economists think the spending cap will be broken soon, perhaps as early as next year, which has helped push long-term interest rates sharply higher in recent months.

Campos Neto repeated his view that only a long-term and serious commitment to rein in the government’s record deficit and debt will bring down long-term borrowing costs.

He also said removing reference to space for further “small” rate cut or cuts from the last policy statement would have generated “unnecessary noise” in the market. Thus, policymakers tried to explain more clearly in the subsequent minutes that prudential and financial stability risks from even lower rates would likely keep further easing on ice.

The more hawkish tone in the meeting minutes published on Tuesday than last week’s policy statement have helped strengthen the Brazilian real and flatten the yield curve, analysts say. (Reporting by Jamie McGeever and Marcela Ayres Editing by Chris Reese and Diane Craft)