06/28/2024 – 13:53
Central Bank President Roberto Campos Neto said on Friday, the 28th, that expectations are very important for price formation and that this is a topic that is not yet well understood. He is participating in the Lisbon Legal Forum in Portugal.
“The expectations channel has proven to be increasingly important and present in modern economies. When we increase public spending, there is a greater perception of risk regarding the sustainability of the debt. The government needs to pay increasingly higher interest rates to make this debt attractive. You have that increase in the risk premium that leads to an increase in future interest rates,” he said.
He continued by assessing that when there is a perception of distrust about public accounts, this also generates a lack of anchoring, present in expectations of inflation and long interest rates. “It is based on inflation expectations that companies and families make investment and savings decisions and that markets define prices,” he noted.
For the BC president, expectations are fundamental variables in the inflation targeting regime. “Hence the importance of anchoring inflation expectations, making the economic environment more stable, predictable and attractive to investors,” he stated.
For him, governments and central banks must work together to strengthen macroeconomic fundamentals, with credible policies. The government’s role would be to facilitate private investment, strengthening the free market. “Public interventions in the economy generate distortions, inefficiency in the allocation of resources and lower growth,” he pointed out.
The president of the Central Bank argued that fiscal sustainability is essential for price stability and interest rate reduction. “Although increased government spending has initial benefits, the costs to be paid in the long term are high and negatively impact investment and growth,” he said.
For him, sustainable growth needs more investment and less consumption and conscious private investment.
He also warned that we will live with a period of higher interest and more debt for longer globally, still a reflection of greater spending during the Covid-19 pandemic period. This increases market fragility and requires special attention to the sustainability of public debt.
Government intervention via subsidized credit
The president of the Central Bank also stated that government intervention through subsidized credit benefits larger companies, but that this is not always done in the most efficient way. “When the government uses a lot of subsidized credit, it does not have such an effective effect on investment,” he said.
Campos Neto recalled that when subsidized credit grows a lot, it generates an effect on the neutral interest rate. He noted that the BC recently revised this rate in Brazil and that several countries are discussing the topic.
The comments were made in the wake of a realization that the capital market is important for improving the efficiency of resource allocation. “Governments and central banks need to make it clear that markets have to operate more freely,” he said.
He also pointed out that it is a problem when the public sector is too large in the market, because it takes away information about prices. “Prices are important for those who make economic policy to understand where the problem is coming from,” he said.
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