Economist predicts Brazil Central Bank will have to issue currency

Economist predicts Brazil Central Bank will have to issue currency

Aloísio Araújo sees the possibility of the Central Bank issuing currency, if it has difficulty selling government bonds at low interest rates; Transfero’s thesis analyzes such scenario

Economist predicts Brazil Central Bank will have to issue currency

By Editorial Staff

The Central Bank (BC) may have to issue currency temporarily to pursue inflation targets. The opinion is of the economist and mathematician Aloisio Araújo, scholar of the relations between monetary and fiscal policies. “The main aim has to be the pursuit of the inflation target; the basic tripod has worked in the Brazilian economy, with expenditure caps, along with the floating exchange rate”, he said in an interview to  Valor Econômico.

However, he only sees this scenario of the BC issuing currency if the country has difficulty selling government bonds. In a risk aversion scenario, investors may not be interested in the low interest rate in the country. This may represent a massive capital outflow and devaluation of the Brazilian currency against the dollar.

The economist believes that BC’s interest rate cuts are on the right track. For him, the rise of the dollar is a necessary effect within the macroeconomic tripod. BC’s decision was criticized by the market because it raised the slope of the interest rate curve and devalued the currency.

According to him, the slope of the interest curve can increase or decrease due to other factors, such as political risk. He cites as an example other countries that have reduced interest rates and had lower exchange rate devaluation than Brazil.

Araújo points out that he is a critic of Modern Monetary Theory, which provides for the issuance of money to reactivate the economy. For him, there is no basis in this theory and BC’s actions would be a temporary solution.

Transfero’s thesis sees difficulties in the sale of government bonds

The measures being taken by central banks around the world show that the tooling to combat the crisis is running out, as it has been the same since the housing crisis of 2008. Since then, the world has experienced a decade of low interest rates and inflated assets by buying papers by central banks. In Brazil, reducing interest rates can lead to difficulties in financing debt. It is this scenario that leads to Transfero’s investment thesis that digital assets have high potential for appreciation in the medium and long term.