Brazil: Unanchored Inflation Expectations And The Fiscal Risk Premium

Brazil faces a significant de-anchoring of long-term inflation expectations due to fiscal fragility. This dynamic forces a more restrictive monetary policy that carries a higher cost to economic growth.

Key Takeaways

• 1.Longer-term inflation expectations in Brazil have de-anchored, driven significantly by fiscal deterioration and an increasing inflation risk premium.
• 2.The lack of fiscal credibility forces monetary policy to remain more restrictive for longer, increasing the cost to economic activity.

Table of Contents

• Two measures, same direction
• Implied inflation as the price of uncertainty
• Long-term expectations and expected debt
• Measuring the de-anchoring
• The Brazilian experience
• Implications for the outlook
• Conclusion

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