BRASILIA, May 19 (Reuters) – Brazil’s central bank governor Gabriel Galipolo said on Tuesday that the country’s heavy reliance on sovereign debt linked to the benchmark interest rate Selic weakens monetary policy transmission, as higher borrowing costs end up boosting disposable income for bondholders.
Speaking at a Senate hearing, Galipolo cited this effect – which runs counter to efforts to cool the economy – as one reason interest rates in Latin America’s largest economy are highly restrictive relative to peers.
“The more I raise interest rates, the more income holders (of floating-rate) bonds receive,” he said. “And today, 50% of sovereign debt is linked to the Selic rate.”
The benchmark interest rate currently stands at 14.50% as the central bank seeks to bring annual inflation, which reached 4.39% in April, to its 3% official target.
Galipolo said the large share of floating-rate bonds is a peculiarity of the Brazilian economy, noting that the securities – known as LFTs – were created to allow the government to roll over its debt.
Asked about Senate discussions over a possible cap on public debt growth, he said he was concerned such a move could lead market participants to perceive debt rollover as unfeasible, triggering sharp risk aversion.
“That would tend to cause capital flight into another currency, with inflationary effects,” he said.
SUPPLY SHOCKS
Galipolo also noted that Brazil is set to face two supply shocks – higher oil prices and the risk of a very strong El Nino – at a time of elevated inflation, with unemployment at a record low and robust income growth.
He stressed that core inflation measures are currently running at the same level as headline inflation, both above the 3% target.
(Reporting by Marcela Ayres; Editing by Gabriel Araujo)
