Increased public spending could spur inflation expectations and volatility in the financial system, according to documents released Thursday by Brazil’s Central Bank.
According to the minutes of last week’s meeting of the Financial Stability Committee (Comef), a “loss of confidence in fiscal management” could weaken the stability of the financial sector.
The committee, composed of the Board of Governors’ members, defines strategies, guidelines, macroprudential measures and instruments to preserve financial stability and mitigate systemic risk.
While the country’s financial system is “resilient” and does not have significant problems, greater uncertainty has amplified the impact of increased spending since the committee’s meeting in September, said the minutes.
“The most severe impact continues to be the one observed in the scenario of a loss of confidence in fiscal management,” it said.
“The increase in public spending and uncertainty about the path of the debt may increase risk premiums and inflation expectations, with repercussions on financial stability,” it added.
According to the committee, that could lead to increased asset volatility, greater difficulty in paying debt, and a deterioration in the quality of capital flows.