UPDATE 1-Brazil central bank warns of inflation risks from fiscal stimulus
(Adds details from policy minutes, context)
BRASILIA, Dec 13 (Reuters) - Brazil's central bank on Tuesday warned of inflation risks from a more expansionary fiscal policy as leftist President-elect Luiz Inacio Lula da Silva seeks Congress approval for a multi-billion dollar welfare spending package.
The impact of "significant" fiscal stimulus on inflation tends to outweigh the effects aimed at activity as Brazil's jobless rate hovers around seven-year lows, policymakers said in the minutes from its last policy meeting.
They stressed that the reversal of structural reforms that lead to a less efficient allocation of resources "might reduce the power of monetary policy."
The remarks came as Lula's government transition team highlighted the need to reform how state-run development bank BNDES charges interest rates to lenders, a change that could dilute the impact of the central bank's decisions.
In the minutes from its meeting held between Dec. 6-7, the rate-setting committee known as Copom kept the benchmark rate at 13.75%, saying it "extensively" discussed the impacts of different fiscal scenarios on inflation.
"The committee reiterated the different channels through which fiscal policy can affect inflation not only via the primary effects of aggregated demand but also via asset prices, the degree of economic uncertainty, inflation expectations and neutral interest rate," it said.
After leaving interest rates unchanged for the third consecutive policy decision, following an aggressive tightening totaling 1,175 basis points since March 2021, policymakers had already highlighted fiscal uncertainties from Lula's spending boost plan.
The spending bill, which has yet to be voted on in the Lower House, is expected to pressure public debt, implying higher financing costs for the government's hefty interest bill.
The proposal made economists estimate that monetary easing will begin later in 2023, with some projecting resumed hikes. (Reporting by Marcela Ayres; Editing by Louise Heavens and Arun Koyyur)
